Final Results

7th May 2008 07:01

Metro Baltic Horizons PLC07 May 2008 7 May 2008 Metro Baltic Horizons plc (MET.L) Preliminary Results for the year ended 31 December 2007 METRO BALTIC ANNOUNCES 61% RISE IN NAV Metro Baltic Horizons plc ("MBH" or the "Company"), the property investmentcompany focused on prime office, retail and residential developmentopportunities in St Petersburg, Russia and the cities of Riga, Latvia andTallinn, Estonia announces its results for the period ended 31 December 2007. Highlights for the period include: • Net asset value per share before deferred tax liabilities up 61% to151p or €2.05 since Admission on 11 December 2006. NAV after deferred taxliabilities was up 35% to 1.27p or €1.72 • Total property portfolio now valued at €63.8 million (30 June 2007:€52.6 million) • Profit before tax of €6.35m (2006: n/a) • At the year end, the Company held a total of €8.7m of asset-level bankdebt, of which €5.7m was assumed as part of acquisitions completed during theyear. The Company's strategy remains to finance property acquisitionsconservatively and substantially with equity and to reserve its borrowingcapacity to fund construction and development. • Entire IPO proceeds committed during reporting period, with fourhigh-quality assets acquired in prime locations in the Company's target cities,of St Petersburg, Riga and Tallinn; each meeting the Company's stated investmentcriteria and offering geographic diversification as well as being complementaryin terms of their respective development timelines • Operational highlights: - Strong planning progress at the Company's assets at Krasta 99, Riga,Latvia and Bolshaya Pushkarskaya 10, St Petersburg, Russia; preliminary planningapproval for Pirita Road, Tallinn, Estonia expected in August 2008 - Construction commenced in October 2007 at the Company's Metro Plazascheme in Viru Square, Tallinn; with long term lease agreements already signedcovering more than 70% of the project's anticipated annual lease income andnegotiations ongoing with a number of other high quality tenants in relation tothe remaining space in the development. - Attractive financing terms secured for Metro Plaza and Pirita projects • Company is particularly excited by the prospects for the St Petersburgmarket where demand for high-quality space is forecast to outweigh supply. Robin James, Chairman of MBH, commented: "The Company has made considerable progress both in terms of its investmentactivities and its financial performance in its first full year of trading. Oursuccess in having more than 70% of Metro Plaza, our most advanced project, leton long term leases nine months ahead of the project's completion underscoresthe quality of our team and soundness of our business model. We had fullycommitted our IPO proceeds by September 2007 and assembled a strong portfolio ofprime city assets in the office, retail and elite residential sectors which areall uniquely situated and where the supply/demand dynamic are forecast to remainfavourable. Prices and rents in these market segments have remained atrelatively high levels and resilient to the general softening in prices seenelsewhere. "Despite more challenging economic and property market conditions, we remainconfident that the Company's investment portfolio will generate an averageinternal rate of return in excess of our targeted 25%. We have createdsignificant asset value for our shareholders since listing and look forward toanother successful year." James Kenny, Chairman of Metro Frontier, the Company's Investment Manager,added: "The Company's stated IPO objectives - to focus on acquiring land, securingplanning consents and all attendant construction and other permissions - haveall been achieved in 2007 and the Company is actively progressing thedevelopment of its assembled property portfolio. In addition, we continue toidentify and monitor exciting opportunities for potential future investmentthrough our network of offices and extensive local contacts, particularly in theSt Petersburg market where, in our view, the current supply of high-qualityspace falls considerably short of current and forecast demand. "We look forward with confidence as we continue to make strong progress with theconstruction and letting of our existing schemes and to expanding the Company'sportfolio with similar schemes offering substantial potential to create value.We have already consolidated our position as one of the leading westerninvestors in our target region and will build on this further for the benefit ofthe Company's shareholders." For further information, please contact: Metro Group Financial DynamicsJames Kenny [email protected] Stephanie Highett / Richard SunderlandMart Habakuk [email protected] Tel: +44 (0) 20 7831 3113 Fairfax IS (Nominated Adviser and Broker)Paul RichardsTel: +44 (0) 20 7598 4078 Notes to Editors Metro Baltic Horizons (ticker code: MET.L) is a property investment companytargeting the dynamic and fast growing cities of St Petersburg, Russia and Rigaand Tallinn, the capitals of Latvia and Estonia respectively. St Petersburg isregarded as one of the top investment locations in Russia and the Baltic Stateshave been and remain amongst the fastest growing economies in Europe. Combined,this represents a strategically located region with developed and improvingbusiness, trading and political links. The Investment Adviser is an experienced and fast growing property asset managerand developer with offices in Riga, Tallinn and St Petersburg. It has a team of30 experienced professionals managing a portfolio of 21 projects across theregion where it has been active since 2001. Metro Group, the Company'sInvestment Adviser and Manager, is responsible for sourcing and recommendingsuitable property development opportunities to the Company principally in theoffice, retail and residential sectors and targets development projects whichcan demonstrate an ability to generate a minimum internal rate of return to theCompany of 25%. St Petersburg is the fourth largest city in Europe with a population of 4.6million.The former capital of Russia; it is located 140 kms from the Estonianborder and is the administrative capital of North West region. In recent yearsit has been one of the best performing regions in Russia and in 2007 achieved aGDP growth rate of 6.9%. Riga is the capital of Latvia and has a population of circa 800,000. Latvia wasone of the fastest growing economies in EU in 2007 recording a GDP growth rateof 10.5% compared to an EU (27) average of 2.9%. Growth rates are forecast tostay at relatively high levels with an average annual GDP growth rate of 6.25%forecast through to 2010. Riga's property market has been one of the bestperforming in Europe in recent years. Tallinn, the capital of Estonia, has a population of circa 400,000. Estonia isthe most economically advanced of the Baltic States and with a GDP per capita of€11,300 in 2007 has amongst the highest levels of GDP per head of any of therecent EU entrants and growth averaging over 9% for the last eight years. In2007, Estonian economic growth was 7% and growth of 5.0% is forecast for 2008. Chairman's Statement Introduction I am very pleased to report that your Company has made considerable progressboth in terms of its investment activities and its financial performance in itsfirst full year of trading since the Company's listing on the AlternativeInvestment Market of the London Stock Exchange ("AIM") in December 2006. At the time of listing, the Company raised net equity funds of approximately£24.6m (€36.5m) following a placing of 26.2m new ordinary shares representing anopening Net Asset Value ("NAV") of 94p (€1.39) per share on admission. As at 31December 2007, the comparative NAV as adjusted for deferred tax liabilities was151p (€2.05) per share, an increase of 61%. Ahead of original expectations at the time of the Company's AIM listing, we werevery pleased to have fully committed the IPO proceeds by the end of September2007 and with these funds to have acquired a balanced and attractive portfolioof development assets in our three target cities. Despite the more challengingeconomic and property market conditions now in evidence in our target marketsand elsewhere, we remain confident that the Company's investment portfolio willgenerate an average internal rate of return in excess of our targeted 25%. Financial Performance The Company's audited NAV before deferred tax liabilities at 31 December 2007was 151p or €2.05 and after deferred tax liabilities was 1.27p or €1.72(adjusted NAV). This represents an increase in adjusted NAV since Admission of61% and 35% after deferred tax liabilities. As stated in our Company's mostrecent interim report, each of the Company's assets are held through individualSpecial Purpose Vehicles ("SPVs") and, as the sale of any Company assets willmost likely be structured as a sale of shares of the SPVs, it is not expectedthat under the current tax legislation the deferred income tax liability willarise. As such, we believe the audited adjusted NAV of 151p or €2.05 per shareto be the most representative figure of the Company's performance and currentasset position. Despite the impact of currency fluctuations during the period and the downturnexperienced in global property markets, this very strong NAV uplift generatedrepresents an excellent performance for the Company in its first full year oftrading. This NAV uplift also demonstrates the quality of the Company'sinvestments and the ability of the Investment Manager to identify and acquireprime assets for the Company at attractive prices, in line with statedinvestment criteria and in a fast and efficient manner. At 31 December 2007, the Company's property portfolio was valued at €63.8m. During the period, the Company recorded a profit before tax of €6.35m. At the end of the year the Company remained conservatively geared with a totalof €8.7m in bank debt all of which was held at SPV level and of which €5.7m wasassumed as part of acquisitions completed during the year. This relatively lowlevel of gearing also reflects the Company's strategy of financing propertyacquisitions conservatively and substantially with equity, and reserving theCompany's borrowing capacity to fund construction and development. As such, theCompany's investment activities were somewhat insulated from the deteriorationand liquidity crisis in the local and international banking markets seen in2007. Further details on the Company's financing activities are contained in theInvestment Manager's report below. Investment Objective and Strategy Metro Baltic Horizons ("MBH") is the first and only London listed investmentCompany specifically targeting direct property investment and developmentopportunities in the dynamic markets of St Petersburg, Russia and the BalticState capitals of Tallinn (Estonia) and Riga (Latvia). In addition to theirclose geographic proximity, these cities share many common characteristicsincluding a historical trend of above EU average GDP growth, increasing foreigndirect investment, significant infrastructure investment, rising levels ofdisposable income and a limited supply of quality, modern property stock. With the IPO proceeds now fully committed, the investment objective of theCompany remains to provide shareholders, by investing in real estate assets inthe target cities, with a high level of total financial returns, principallycomprising capital growth but with the potential for dividend payments over themedium to long term. The Company expects to achieve this objective by pursuing a very specificinvestment strategy • MBH will only invest in the cities of St Petersburg (Russia), Riga(Latvia) and Tallinn (Estonia) • MBH will only invest in prime city locations where the supply/demanddynamics for the specific asset in the specific location are favourable • MBH will focus on development opportunities rather than investing inthe very limited pool of quality developed assets in the region • MBH will only consider investments which can reasonably be expectedto generate a minimum internal rate of return in excess of 25% • MBH will concentrate its investments in the office, retail andresidential sectors • MBH will favour property development projects where there is a clearopportunity to enhance investment returns and shareholder value through theplanning process and active asset management. Investment Overview During the period ended 31 December 2007, the Company acquired four high-qualityproperties in prime locations in the target cities, each of which met theCompany's stated investment criteria as outlined above. These properties werealso selected and recommended by the Investment Manager to the Board as theyoffered shareholders geographic portfolio diversification as well as beingcomplementary in terms of their respective development timelines. It has beenand remains, an objective of the Investment Manager to identify projects whichas part of a portfolio of property development assets, allow the efficientutilisation and phased reinvestment of shareholders' equity over the life of theCompany as this potentially facilitates higher investment returns. In the context of reporting the Company's financial commitments below, we haveonly included the Company's share of acquisition costs and the 12 month workingcapital requirement for each development rather than the gross equityrequirement over the life of the respective projects, some of which aremulti-phased. Gross Development Cost as detailed below includes acquisition andestimated development costs, fees and financing charges. Summary of Company's Investment Portfolio City Location Development MBH Gross area Estimated completion Total Acquisition & Type Share sq m- excl. schedule estimated Gross parking Development Cost (MBH share)Tallinn Viru Square Office/retail 100% 8,900 Q1 2009 €26 millionTallinn Pirita Road Residential/ 80% 12,000 Phased 2010-2011 €21 million hotelRiga Krasta Street- Office 80% 15,000 (Block 1) 2010-2011 €34 million Phase 1 Phase 2 Office 80% 35,000 (Blocks 2&3) €50 million 2011-2013St Petersburg Bolshaya Office/retail 100% 22,000 Phased Q4 2009-Q4 • 60 million Pushkarskaya 2010 The Company is currently fully invested having acquired its property investmentson practically a full cash equity basis. This approach is in line with theCompany's stated financing strategy of preserving leverage capacity to financethe construction and development programmes. On the basis of planned developmenttimelines for the projects and prudent leverage assumptions, the Company isoptimistic that it will secure adequate financial resources to build out andcomplete its property development portfolio. It is also expected that anyreinvestment of investment gains or the proceeds of any further capital raisingwhich may be undertaken by the Company in the future, would be significantlyweighted towards St Petersburg over time. This expectation is based on both theincreasing attractions and scale of the St Petersburg property market, both in aregional and international context, the shortages of prime stock and the rangeand quality of the development opportunities being seen by the Company in theCity. Further details on each of the Company's property investments are contained inthe Investment Manager's report below. Financing A total of €36.6m of equity was invested by the Company during the period ended31 December 2007. Of this amount, approximately 35% was been invested in StPetersburg, 35% in Tallinn and 30% in Riga. The majority of investment made wasequity financed in line with the Company's strategy of 'leading with equity' atacquisition and preserving leverage capability to finance development. The four transactions completed during the year were substantially equityfinanced with only €5.7m of debt assumed as part of the acquisitions. TheCompany has since the year end refinanced the property in Pirita, Tallinn,acquired in September 2007, securing a loan from a major leading internationalbank of €3.7m (representing 50% loan-to-value) at a margin of Euribor plus 1.5%.We believe that this refinancing and the terms secured further demonstrates thequality of the Company's portfolio as, despite the more challenging financialmarket conditions and greatly reduced banking liquidity, the loan was drawn atSPV level, is non-recourse and is secured over a single prime asset, namely aplot of land currently without the requisite planning approvals for its nowintended development. The other asset in the Company's portfolio which was financed during the yearwas the Metro Plaza development in Viru Square, Tallinn which was acquired bythe Company in June 2007. In September 2007, the Company organized a financialtender and received offers of finance from four leading banks to fund theconstruction of the property. The Company subsequently drew a loan facility atSPV level, with a leading Scandinavian owned bank, to fund 100% of the turnkeyconstruction contract cost, plus an additional €2.0m equity release to theCompany, at a margin of Euribor plus 1%. These are excellent terms to achieve inany market conditions and not only fully vindicate the company's 'equity-led'financing strategy but also demonstrate that the financial markets in the regionremain open for well structured, quality assets in prime central locations. Discussions are progressing positively with prospective lenders in relation tothe provision of construction finance for the Company's Krasta 99 and BolshayaPushkarskaya developments and preliminary offers of construction finance havealready been received. Final term sheets will be subject, inter alia, to thereceipt by the Company of final planning and building permits and this processis proceeding according to expectations. At year end the Company remained conservatively geared with a total of €8.7m ofdebt on its balance sheet representing less than 13% of the Company's grossassets. The Company, as advised by the Investment Manager, is confident thatbased on reasonable expectations, it will have the necessary finance availableto it to allow it develop its current portfolio. However, the Company may atsome point consider, subject to market conditions, alternatives for the raisingof additional finance to allow it to scale up the Company's investmentactivities and development portfolio and selectively take advantage of certainof the opportunities being identified by the Investment Manager in the targetregion. In order to potentially raise further equity capital for investment, theCompany may in the future consider issuing C ordinary shares ("C Shares"). Inthis regard, shareholders' attention is drawn to the resolutions to beconsidered at the forthcoming Annual General Meeting of the Company, whichinclude a resolution to approve the creation of a new class of C Shares. The CShares which may be issued represent a separate class of shares which wouldconvert on a net asset value to net asset value basis, once the proceeds fromthe issuance of C Shares had been substantially invested. The advantages forshareholders in adopting this approach are that they will not be diluted by anissue of ordinary shares below net asset value, they will not suffer any cashdrag on their investment performance whilst the proceeds of the C Shares arebeing invested and they will not bear any of the costs of the issue of the CShares. The Company currently has no plans to undertake such an issue of CShares, however the resolution is being proposed to shareholders so that, if andwhen it is considered appropriate to do so, an issue of C Shares could proceedin a more timely and cost effective basis. Market The market in the target cities for prime developed assets has been highlycompetitive for a number of years as a large number of local and internationalinvestors sought exposure to these fast-growing and dynamic areas and chased alimited pool of available assets. As a result and as previously reported, primeyields in the Baltics in particular have compressed down to levels where theyare now close to core European market levels. In the current more challengingeconomic environment, it is difficult to see further downward movement in theshort term, although rising rents and shortage of stock point to potentiallymore compression in the retail and office sectors in particular. However, thisrecent flattening of yields does not particularly constrain the Company which,as advised by the Investment Manager, pursues a capital gain rather than yieldcompression investment strategy. Conservative exit yields on disposal ofinvestments based on current market valuations have been assumed in theCompany's central case business forecasts. The St Petersburg property market remains considerably less developed than thoseof the Baltic capitals, but offers significant scale and vast investmentpotential in virtually every class of real estate. Unlike the Baltics, yieldsfor prime assets at circa 9% offer scope for significant compression over thenext few years. Investor interest in St Petersburg has grown very strongly overthe last 12 months and, although there is greater competition for developedassets, there remains a strong opportunity for investors such as the Companywith a local development capability. In St Petersburg as well as in the Baltics,supply of prime stock remains very tight and vacancy rates range from 0-5% inthe relevant market segments. We have seen evidence of significantly reduced levels of liquidity in the marketand banks remain cautious although still open for business. Our success infinancing the Metro Plaza development and the refinancing of Pirita, both inTallinn, has been very encouraging and we believe that finance will continue tobe available for well located, conservatively financed prime properties. Manybuyers have disappeared from the market, some permanently, and others justpostponing investment decisions until markets stabilise. Many developers who hadbeen working from a limited equity base or were active in second city orinferior locations have been significantly affected by market conditions and thetighter financing environment. Accounts The Company's functional and reporting currency is the Euro, being the currencyin which the majority of the Company's expenditures and forecast revenues aredenominated. The Company has adopted International Financial Reporting Standards("IFRS") reporting standards and has prepared full audited consolidatedfinancial statements for the period ended 31 December 2007 on that basis. Board I would again like to pay tribute to Stuart McDonald, the former Chairman of theCompany, who passed away during the year, and whose skills and experience playeda key role during the formation and listing of the Company. Outlook Despite the sub prime crisis and its inevitable impact across the world, thegrowth prospects for the region - whilst slowing marginally - remain atcomparatively high levels both in an EU and broader emerging markets context.Deposit rates in Baltic banks are at or close to all-time highs and theeconomies which are still growing at a multiple of EU levels are expected tomove clearly into recovery phase within 9-12 months. Our success in having more than 70% of Metro Plaza, our most advanced project,let on long term leases some nine months ahead of the project's completionunderscores the quality of our team and soundness of our business model. We haveassembled a strong portfolio of prime city assets in the office, retail andelite residential sectors which are all uniquely situated and where the supply/demand dynamic are forecast to remain favourable. Prices and rents in thesemarket segments have remained at relatively high levels and resilient to thegeneral softening in prices seen elsewhere. There will be challenges to face,many of which will be outside of our direct control, but we are confident of ourability to meet them. We have created significant asset value for ourshareholders since listing and look forward to another successful year. Robin JamesChairman7 May 2008 Investment Manager's Report Introduction Metro Capital Management AS and Metro Frontier Limited (together "Metro Group")act as Investment Adviser and Investment Manager respectively to the Company.Metro Group is an experienced and fast growing property asset manager anddeveloper with 30 professionals operating out of offices in St Petersburg,Tallinn and Riga. Metro have been involved in property development and assetmanagement in the region since 2001 and manage a portfolio of 21 projects forsome 200 institutional and private investors and which have historicallygenerated an average annual return on equity of over 60%. Since the Company's listing, we have implemented the Company's stated investmentstrategy by identifying and recommending to the Board a number of transactionswhich not only met the Company's investment criteria but when assembled, offeredshareholders a portfolio balanced by geography, sector and development timeline.A total of four transactions were completed during the year, all of which weresourced by Metro Group without external agent involvement or cost to theCompany. Valuation A valuation of all of the Company's property assets held as at 31 December 2007was undertaken to determine their fair market value and, in turn, the Net AssetValue ("NAV") of the Company. The valuation was undertaken by ColliersInternational through their offices in St Petersburg, Tallinn and Riga. ColliersInternational is one of the leading real estate consultants with a network of256 offices worldwide. The valuation was carried out in accordance with relevantinternational standards. The Company's policy is to independently revalue itsassets twice per year, on 30 June and 31 December. Current Investment Portfolio The Company's Investment Portfolio now comprises four assets in St Petersburg,Riga and Tallinn. In total, these schemes have the potential to compriseapproximately 84,000 sq metres of built area and an estimated Gross DevelopmentCost (acquisition, development, finance and fees) to the Company ofapproximately • 190 million. A detailed description of the Company's four schemes is provided below: Bolshaya Pushkarskaya 10, St Petersburg, Russia The first investment by the Company was made in May 2007 on BolshayaPushkarskaya, a prominent street in the centre of St Petersburg in thePetrogradski district. The investment involved the acquisition of a 100%interest in an office complex on a privatized, freehold site of 0.72 hectares.Less than 5% of the land in St Petersburg is currently in private ownership andthe freehold status of the property was a further attraction of the investment.The site runs parallel to Bolshoi Prospekt, one of St Petersburg's main shoppingand business streets, and is less than 3 kms from the Winter Palace. Currently,there are six existing buildings on the site, of which one is of relativearchitectural merit and will be maintained and refurbished, and the othersdemolished for full redevelopment. The site itself is unusual in that it has approximately 150 metres of directstreet frontage which facilitates the development of a mixed office and 'owndoor' retail scheme on the site. Although final planning for the redevelopmenthas yet to be received, current estimates indicate that the redeveloped complexcould comprise 22,000 sq m gross area of office and retail space and on-siteparking for circa 290 cars. Since the acquisition we have received preliminary planning approval and areclose to finalizing building volumes and architectural sketch design. Theestimated total investment by the Company in the redevelopment of the officecomplex (including its acquisition, construction and finance) is now estimatedto be circa €60m. It is anticipated that the complex would generate a rentalyield of approximately 15% on total cost when fully let on completion. Theacquisition was fully equity financed and is expected to be part refinanced withlocal bank debt later in 2008. Post-refinance, it is expected that the Company'sequity investment in the development will utilise circa 20% of currentshareholders' funds. Development costs are expected to be substantially bankfinanced from local sources on a non-recourse basis to the Company. Preliminaryoffers of finance have already been received by the Investment Manager. The demand for Class A offices in St Petersburg is very strong particularly inprime locations and is forecast to remain so over the medium term. Class Avacancy rates are currently close to 0% which is not surprising given the lackof investment in the office market in recent years and also when it isconsidered that, at the end of 2007 in St Petersburg, there was only 320 sq m ofquality office space per thousand inhabitants which is amongst the lowest of anymajor city in Europe and also considerably below comparable Moscow levels. At 31 December 2007, Bolshaya Pushkarskaya 10 was valued by Colliers at €27.6mon an open market basis. Krasta 99, Riga, Latvia This asset is a prominently located land plot of 1.7 hectares situatedapproximately 5 kms from Riga Old Town at the intersection of a major inner cityhighway (Krasta Street) and the new Riga South Bridge which is due to open forcivilian traffic in 2009. The site is very well suited for a modern officedevelopment, with high visibility, extensive on site parking and easy access tothe City. Planning permission has been granted for the construction ofapproximately 50,000 sq m of gross office space in three towers together withapproximately 1000 on-site and underground parking spaces. As current andforecast supply for Class A and B offices in prime central locations is quitelimited, demand for offices with competitive rent levels, good access andparking is expected to remain very strong. A number of parties have alreadyindicated interest in acquiring or leasing space in the development and thesediscussions are being progressed. In 2007 Class A and B office rents in Rigaincreased by an average of 7.5% and vacancy rates are 1.5%. The proposal for the Krasta 99 project involves the development of threeseparate 17-floor towers on a phased basis. Sketch design documentation for theproject is currently being reviewed and will shortly be submitted to theConstruction Board of Riga in April 2008. At present it is expected that abuilding permit will be in place by Q3 2008 with construction scheduled tocommence in Q4 2008. The estimated gross development cost (acquisition,construction and finance) for the full three phases of the project (100%) isestimated at €105 million of which 80% will be attributable to the Company.However, the Company intends to build the towers separately and close tocompletion (H1 2010) of the first tower (15,000 sq m), a final decision will bemade on the timing and development strategy for the second (20,000 sq m) andthird (15,000 sq m) towers respectively. Although the Company is confident ofundertaking the sole development of the Krasta 99 project, the InvestmentManager, on behalf of the Company, may consider other strategies including jointventure and/or the sale of construction rights for the other towers. The Company owns an 80% interest in Krasta 99 with the balance held on a fullycontributing basis, by local financial investors. At December 31 2007, Krasta 99was valued by Colliers at €16.2 million on an open market basis. Metro Plaza, Viru Square, Tallinn, Estonia In June 2007, the Company acquired a 100% interest in this landmark Tallinnsite. The property is the Company's most advanced asset and comprises a run-downhistoric building on a 2,200 sq m land plot located on a high profile square inthe centre of Tallinn on the very edge of Tallinn Old Town, an area thatcurrently commands some of the highest rents in the city. When acquired,planning permission and a construction permit had already been secured for theconstruction of a new seven-storey building on the site, with retail space onthe first and second floors and offices on the third to seventh floors. Theoriginal facade of the building is being retained and will allow the developmentof what we believe in time will become one of the most prominent and prestigiousbuildings in the City. Following a competitive construction tender process, aturnkey construction contract was signed in September with one of the leadingEstonian construction companies. Offers of construction finance were receivedfrom four local and international banks and despite the challenging financialenvironment, a loan facility was agreed in October 2007 with one bank for 100%construction finance facility plus an equity release to the Company of €2.0m, atan overall margin of Euribor plus 1%. Construction commenced on schedule in late October and remains on schedule forcompletion in December 2008 with handover to the Company planned for Q1 2009.Once completed, the building to be named Metro Plaza will comprise 8,900 sq m ofgross retail and office floor space (7,230 sq m net area), as well asunderground parking for 78 cars. It is estimated that the project will have atotal gross development cost (acquisition, construction and finance) ofapproximately €26 million, of which circa €8 million will be equity funded. Longterm lease agreements have already been signed covering more than 70% of theproject's anticipated annual lease income and lease negotiations are ongoingwith a number of other high quality tenants in relation to the remaining spacein the development. As such, we are very confident that the entire building willbe fully leased before completion and that an annual average rent of circa €300per net sq m, excluding parking, will be achieved, and which would represent thehighest rents achieved in Tallinn for such a mixed scheme. We believe that whenfully let Metro Plaza will be a unique and readily saleable property andthat-barring no unforeseen change in market conditions- an exit yield of 6%would be realistic. It is expected that the building will be offered for sale by the Company in H12009 and unsolicited expressions of interest from prospective buyers havealready been received. At December 31 2007, Metro Plaza was valued by Colliersat €13.1 million on an open market basis. Pirita Road, Tallinn, Estonia In September 2007, the Company acquired an 80% interest in a 1.3 hectare primedevelopment site on the Pirita Road in Tallinn. The site is uniquely situatedapproximately 500 metres from the President's castle, overlooking the Bay ofTallinn, and 3 kms from the city centre in an area rapidly becoming one of theTallinn's premier residential locations. When acquired, the site, which is in anarea zoned for residential development, had detailed plans approved for a 40,000sq m residential development. The Company, as advised by the Investment Adviser,proposes to sub-divide the site and reconfigure the building plans toaccommodate an elite 9,000 sq m prime residential apartment development and aseparate development comprising a circa 3,000 sq m boutique spa hotel in acurrently protected building on the site. The project is expected to bedeveloped and released on a phased basis, with initial completion expected in2010. The total gross development cost of the project (acquisition, estimatedconstruction, fees and finance) is currently estimated at approximately €26m ofwhich it is expected that circa 70% could be bank financed. Revised planning conditions have now been received from the Tallinn City Counciland the Investment Manager has initiated an architectural tender with formalappointment of architects expected to be made in May 2008. Although it is notexpected that planning approval for the new sketch design for the Piritadevelopment will be secured until August 2008, it is envisaged that thedevelopment will comprise 80 elite apartment units with more than 90% havingunobstructed sea views. This elite residential market is viewed as undersuppliedin Tallinn and prices in comparable high end developments have remained robusteven current market conditions. Construction is scheduled to commence on theapartment development subject to planning in Q1 2009. As at 31 December 2007, the Pirita site was valued by Colliers at €8 million onan open market basis. Economic outlook Since achieving independence in 1991, the Baltic States have rapidly modernised,developed fully functioning market economies and have achieved relativemacro-economic stability. Estonia and Latvia have been amongst the bestperforming of economies in the world in recent years with Estonia and Latviaexperiencing average GDP growth of 9.25% and 10.3% respectively over the lastfour years. The main causes of this economic boom and subsequent slowdown areessentially the same-domestic demand boosted particularly by EU accession in2004 and the subsequent monetary expansion. This sustained period of economicgrowth, coupled with a stable political and pro-business environment includinglow flat tax rates, helped increase disposable income and consumption andfuelled very strong property price growth. Not unexpectedly and as seen in manyother developed and particularly emerging markets, the economic conditions inthe Baltics deteriorated in the second half of 2007 with fourth quarter highfrequency economic indicators showing the first signs of the economies slowing.This slowdown is a consequence of various factors principally including adecline in private sector credit growth and rising domestic interest ratescoupled with global economic and financial market volatility. However a 'softlanding' is now widely anticipated for the Baltics and GDP growth rates of 6%and 5% for Latvia and Estonia respectively are forecast for 2008, considerablyhigher than the EU average forecast level of 2.7% .It is expected that theEstonian economy will move clearly into a recovery phase in the second half of2008 with Latvia following in 2009. With a developed predominantlyScandinavian-owned banking sector applying conservative financial policies,ongoing EU convergence, significant continued inflows of EU funds forecast (3-4%of GDP) and a favourable long-term property supply/demand dynamic, we believethat prime Baltic property remains an attractive asset class with good mediumand long-term prospects for capital appreciation. The general improvement in the Russian economy in recent years and the increasedstability in Russian government finances, have been evident across all majorindicators. St Petersburg, Russia's former capital and second largest city, hasover the past five years also experienced significant and consistent economicgrowth, considerably above Russian regional averages. In 2006, there was adramatic increase in foreign direct investment into St Petersburg and investmentgrowth continued in 2007 increasing by more than 25%. These factors have helpedboost demand across all sectors of real estate. However, there has beensignificant under-investment in the St Petersburg property market for a numberof years and this, coupled with increased market demand, has resulted in therebeing considerable shortages of stock in several market sectors particularlyoffices, residential and retail. With a population of 4.6 million, St Petersburgis Europe's fourth largest city and one of the most compelling propertyinvestment market opportunities both in terms of potential returns and scale. Investment Prospects At the time of AIM admission in December 2006, the Company anticipated that itsinvestment objectives during the first 18-24 months would be to focus onacquiring land, securing planning consents and all attendant construction andother permissions. These objectives have been met and the Company is activelyprogressing the development of its assembled property portfolio. With theexception of the Metro Plaza office/retail development in Tallinn, which is inconstruction and is expected to be completed in early 2009, the majority of theCompany's developments are scheduled for completion from late 2009 onwards, atwhich time we are confident that the economies and property markets in thetarget cities will be receptive and the supply of new prime stock in centralcity areas to be potentially constrained. There a number of challenges and opportunities which will impact investmentprospects for the Company. The key negative factors are the rising cost offinance and the increased conservatism of lenders. We are also seeing doubledigit construction cost inflation in the St Petersburg market ahead ofexpectations, although we believe that well situated prime developments such asBolshaya Pushkarskaya will be largely able to pass on such cost increase tobuyers and tenants. By contrast, construction costs in the Baltics are graduallyfalling and we see evidence of stable or increasing rents and prices in ourtarget market segments. Although the Company is fully invested, we continue to identify and monitorexciting opportunities for potential future investment through our network ofoffices and extensive local contacts. As outlined in the Chairman's statement,we are particularly excited by the prospects for the St Petersburg market where,in our view, the current supply of high-quality space falls considerably shortof current and forecast demand. To the extent that the Company procuresadditional funding through asset disposals or third party subscriptions in thefuture, we anticipate that the Company's investment portfolio may becomeincreasingly biased towards St Petersburg over time. We look forward with confidence as we continue to make strong progress with theconstruction and letting of our existing schemes and, in time, the expansion ofthe Company's portfolio with similar schemes offering substantial potential tocreate value. We have already consolidated our position as one of the leadingwestern investors in our target region and will build on this further for thebenefit of the Company's shareholders. Metro Group7 May 2008 Consolidated Income StatementFor the period from 18 September 2006 to 31 December 2007 Note •'000 Gross rental income 280Service charge expense (292) _______Net rental and related income (12) Administrative expenses 3 (1,638)Excess of fair value of acquisitions over purchase price 6,887Changes in value of investment properties (257)Net foreign currency gains 639 _______Net operating profit before tax and finance income 5,619 Finance income 4 869Finance expense (136) _______Profit before tax 6,352 Tax credit 5 154 _______Profit for the period 6,506 Minority interest (32) _______Profit attributable to shareholders 6,474 ====== Basic earnings per share (cents) 6 24.71 Diluted earnings per share (cents) 6 24.40 Consolidated Statement of Changes in EquityFor the period from 18 September 2006 to 31 December 2007 Share Share Distributable Revaluation FX Gains Retained Minority Capital Premium Reserves Reserve or losses Earnings Interest Total •'000 •'000 •'000 •'000 •'000 •'000 •'000 •'000 At 18 September 2006 - - - - - - - - Issue of share capital 262 38,513 - - - - - 38,775 Cost of issue of shares - (2,327) - - - - - (2,327) Transfer to - (36,186) 36,186 - - - - -Distributable Reserves Revaluation of - - - 2,388 - - - 2,388properties Acquisition of - - - - - - 161 161subsidiaries Profit for the period - - - - - 6,474 32 6,506 FX Gains or losses - - - - (186) - - (186) _______ ______ _______ _______ _______ _______ ______ _____ Total 262 - 36,186 2,388 (186) 6,474 193 45,317 ====== ===== ====== ====== ====== ====== ===== ===== Company Statement of Changes in EquityFor the period from 18 September 2006 to 31 December 2007 Share Share Distributable Retained Minority Capital Premium Reserves Earnings Interest Total •'000 •'000 •'000 •'000 •'000 •'000 At 18 September 2006 - - - - - - Issue of share capital 262 38,513 - - - 38,775 Cost of issue of shares - (2,327) - - - (2,327) Transfer to Distributable (36,186) 36,186 - - -Reserves Acquisition of subsidiaries - - - - - Profit for the period - - - 1,746 - 1,746 _______ ______ _______ _______ ______ ______ Total 262 - 36,186 1,746 - 38,194 ====== ===== ====== ====== ===== ===== Consolidated Balance SheetAs at 31 December 2007 31 December 2007 Group Note •'000 ASSETSNon-current assetsDevelopment property 7 63,836Other assets 5 ______ 63,841 Current assetsTrade and other receivables 8 512Other current assets 20Cash and cash equivalents 9 3,412 _______ 3,944 _______TOTAL ASSETS 67,785 ====== Consolidated Balance SheetAs at 31 December 2007 31 December 2007 Group Note •'000EQUITYIssued capital 14 262Distributable Reserves 15 36,186Retained earnings 6,474Foreign Exchange Movements (186)Revaluation Reserve 2,388 _______Total equity attributable to equity holders of the parent 45,124Minority Interest 193 _______TOTAL EQUITY 45,317 _______ LIABILITIESNon-current liabilitiesBank loans 10 6,301Other loans 11 3,809Deferred tax liabilities 12 8,579 _______Total non-current liabilities 18,689 _______ Current liabilitiesBank loans 10 2,410Trade and other payables 13 1,369 _______Total current liabilities 3,779 _______TOTAL LIABILITIES 22,468 _______TOTAL EQUITY AND LIABILITIES 67,785 ===== Net Asset Value per ordinary share - basic (cents) 16 172Net Asset Value per ordinary share - diluted (cents) 16 170 Company Balance SheetAs at 31 December 2007 31 December 2007 Company Note •'000ASSETSNon-current assetsInvestments in subsidiaries 7 36,895 _______Current assetsTrade and other receivables 8 18Amounts due from other group companies 8 1,012Cash and cash equivalents 9 351 _______ 1,381 _______TOTAL ASSETS 38,276 ======EQUITYIssued capital 14 262Distributable Reserves 15 36,186Retained earnings 1,746 _______TOTAL EQUITY 38,194 ______LIABILITIESCurrent liabilitiesTrade and other payables 13 82 ______TOTAL LIABILITIES 82 ______ TOTAL EQUITY AND LIABILITIES 38,276 ===== Consolidated Cash Flow StatementFor the period from 18 September 2006 to 31 December 2007 31 December 2007 Group Note •'000 Cash flows from operating activities 17 (3,404) _______ Net cash flows from operating activities (3,404) Cash flows from investing activities Interest received 862Acquisition of and investment in subsidiaries (17,238) _______ Net cash used in investing activities (16,376) Cash flows from financing activitiesProceeds from issue of shares, net of issuance costs 36,448Interest paid (446)Repayments of borrowings (12,810) _______ Net cash flows from financing activities 23,192 _______ Net increase in cash and cash equivalents 3,412 Cash and cash equivalents at the beginning of the period - _______Cash and cash equivalents at the end of the period 9 3,412 ====== Company Cash Flow StatementFor the period from 18 September 2006 to 31 December 2007 31 December 2007 Group Note •'000 Cash flows from operating activities 17 (11) _______ Net cash flows from operating activities (11) Cash flows from investing activities Interest received 810Loans to subsidiaries (36,896) _______ Net cash used in investing activities (36,086) Cash flows from financing activitiesProceeds from issue of shares, net of issuance costs 36,448 _______ Net cash flows from financing activities 36,448 _______ Net increase in cash and cash equivalents 351 Cash and cash equivalents at the beginning of the period - ======Cash and cash equivalents at the end of the period 9 351 ====== Notes to the consolidated financial statementsFor the period ended 31 December 2007 1. General Information The Company was incorporated in the Isle of Man on 18 September 2006 as MetroBaltic Hermitage plc. On 13 November 2006 the Company passed a specialresolution to change its name to Metro Baltic Horizons plc. The Company investsin and develops property in the Baltic states and in the St. Petersburg area ofRussia. This report of the Company for the period from incorporation to 31 December 2007comprises the Company and its subsidiaries (together referred to as the "Group"). The Company's registered address is IOMA House, Hope Street, Douglas, Isle ofMan. The Company was admitted to the AIM market of the London Stock Exchange andcommenced operations on 11 December 2006. The Company raised approximately €38.7million (before costs). 2. Principal Accounting Policies A summary of the principal accounting policies, all of which have been appliedconsistently throughout the period, is set out below: 2.1 Basis of Preparation and Accounting The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards adopted for use in the EuropeanUnion ("IFRS"), which comprise standards and interpretations approved by theInternational Accounting Standards Board (IASB), and International AccountingStandards and Standing Interpretations Committee interpretations approved by theInternational Accounting Standards Committee ("IASC") that remain in effect. 2.2 Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and the special purpose vehicles controlled by the Company. Controlis achieved where the Company has the power to govern the financial andoperating policies of an investee entity so as to obtain benefit from itsactivities. Where necessary, adjustments are made to the financial results of SPVs to bringthe accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Minority interests represent the portion of profit or loss and net assets notheld by the Company and is presented separately in the income statement andwithin equity in the consolidated balance sheet. Acquisitions of minorityinterest are accounted for using the parent entity extension method, whereby,the difference between the consideration and the book value of the share of thenet assets acquired is recognised in goodwill. Statement of Compliance The consolidated financial statements of the Group have been prepared inaccordance with IFRS as adopted for use in the EU as it applies to the financialstatements of the Group for the period ended 31 December 2007. In preparing thefinancial statements, the accounting policies applied reflect the amendments toIFRS and the adoption of those new IFRS which were in effect at 1 January 2007. IFRS issued but not yet effective. The Group has not adopted the following standards, interpretations andamendments in the preparation of financial statements as they were not yetapplicable to the Group's business: • IAS 1 (para 124A-124C) - Presentation of Financial Statements Periodscommencing on or after 1 January 2007• Amendment to IAS 1 Disclosure of Certain Information Relating toPuttable Instruments Classified as Equity Periods commencing on or after 1January 2009• IAS 23 Borrowing Costs Periods commencing on or after 1 January 2009• Amendment to IAS 32 Classification as Equity for Certain PuttableFinancial Instruments and Obligations arising on Liquidation Periods commencingon or after 1 January 2009• IFRS 7 - Financial Instruments Disclosures Periods commencing on orafter 1 January 2007• IFRS 8 - Operating Segments Periods commencing on or after 1 January2009• IFRIC 10 - Interim Financial Reporting and Impairment Periodscommencing on or after 1 November 2006• IFRIC 11/ IFRS 2 - Group and Treasury Shares Periods commencing on orafter 1 March 2007• IFRIC 12 - Service Concession Arrangements Periods commencing on orafter 1 January 2008• IFRIC 13 Customer Loyalty Programmes Periods commencing on or after 1July 2008.• IFRIC 14/IAS 19 The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction Periods commencing on or after 1 January2008. The Group is still evaluating the impact that these standards will have on theGroup's financial statements, if any, but expect that there will be no materialimpact when implemented. 2.3 Revenue recognition Rental revenues are accounted for on an accruals basis. Rent is billed inadvance and then allocated to the appropriate period. Therefore, deferredrevenue generally represents advance payments from tenants. Revenue isrecognised when it is probable that the economic benefits associated with thetransaction will flow to the Group and the amount of revenue can be measuredreliably. Interest income is accrued on a time basis, by reference to theprincipal outstanding and at the effective interest rate applicable. 2.4 Investment and development property and property under construction Property held to earn rentals and/or for capital appreciation and that is notoccupied by the companies in the Group, is classified as investment property.Investment property comprises freehold land, freehold buildings and land heldunder operating leases. Investment property is initially measured at costincluding transaction costs. Subsequent to initial recognition investmentproperty is carried at fair value and adjustments to fair value are reflected inthe income statement. Property under construction or for development is also carried at the revaluedamount being the fair value at the date of revaluation less any subsequentaccumulated depreciation and subsequent impairment losses. Adjustments to fairvalue are reflected in the revaluation reserve. The Group has appointed Colliers as property valuers to prepare valuations on asemi-annual basis. Valuations will be undertaken in accordance withInternational Valuation Standards published by the International ValuationsStandards Committee. Investment properties are derecognised when either they have been disposed of orwhen the investment property is permanently withdrawn from use and no futureeconomic benefit is expected from its disposal. Any gains or losses on theretirement or disposal of an investment property are recognised in the incomestatement in the year of retirement or disposal. Transfers are made to or from investment property only when there is a change inuse. Gains or losses arising from changes in the fair value of investment propertyare included in the income statement in the period in which they arise. Gains orlosses arising from changes in the fair value of property under construction orfor development are included in the revaluation reserve. 2.5 Expenses Expenses are accounted for on an accruals basis. Fees payable to the PropertyAdviser are calculated with reference to the cost or valuation of the underlyingproperties held by the Group. Transaction costs directly attributable to the purchase of the investmentproperties are included within the cost of the property. Development costs ofinvestment property are also included within the cost of the property. Borrowingcosts that are directly attributable to the construction of investment propertyare capitalised as incurred. All other administration expenses are charged through the income statement. 2.6 Cash and cash equivalents Cash and cash equivalents consist of cash in hand and short term deposits whichare short term highly liquid investments that are readily convertible to knownamounts of cash and which are subject to an insignificant risk of changes invalue. 2.7 Tax and Deferred Tax The Company is resident in the Isle of Man. Its activities in the Isle of Manare liable to tax at a 0% tax rate. The Directors conduct the Group's affairs such that the management and controlis not exercised in the United Kingdom and so that neither the Company nor anyof its subsidiaries carries on any trade in the United Kingdom. Accordingly, theCompany and its subsidiaries will not be liable for UK taxation. The Group is exempt from Guernsey taxation on income derived outside of Guernseyand bank interest earned in Guernsey under the Income Tax (Exempt Bodies)(Guernsey) Ordinance, 1989. A fixed annual fee of £600 is payable to the Statesof Guernsey in respect of this exemption. No charge to Guernsey taxation willarise on capital gains. The Group is liable to Cypriot tax arising on the activities of its Cypriotoperations. The Group is liable to Dutch tax arising on the activities of its Dutchoperations. The Group is liable to Russian tax arising on the activities of its Russianoperations. The Group is liable to Latvian tax arising on the activities of its Latvianoperations. The Group is liable to Estonian tax arising on the activities of its Estonianoperations. The tax expense represents an accrual for tax which may become payable at theend of the financial year, tax currently payable and deferred tax arising ongains and losses recorded through the income statement. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amount of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. 2.8 Business Combinations The acquisition of subsidiaries is accounted for using the purchase method. Thecost of the acquisition is measured as the aggregate of the fair values at thedate of exchange of assets given, liabilities incurred or assumed and any equityinstruments issued by the Group in exchange of control of the acquiree, plus anycontingent liabilities that meet the conditions for recognition under IFRS 3 arerecognised at their fair values at the acquisition date. Goodwill arising on consolidation is recognised as an asset and initiallymeasured at cost, being the excess of the cost of the business combination overthe Group's interest in the net fair value of the identifiable assets,liabilities and contingent liabilities recognised. Subsequently, goodwillcarried on the balance sheet is assessed for impairment on an annual basis andany impairment charge is recognised in the income statement. If, after reassessment, the Group's interest in the net fair value of theacquiree's identifiable assets, liabilities and contingent liabilities exceedsthe cost of the combination, the excess is recognised immediately in the incomestatement. The interest of minority shareholders in the acquiree is initially measured atthe minority's proportion of the net fair value of the assets, liabilities andcontingent liabilities recognised. 2.9 Foreign currency translation a) Functional and presentation currency Items included in the financial statements of each of the Group entities aremeasured in the currency of the primary economic environment in which the entityoperates (the "functional currency"). The consolidated financial statements arepresented in Euro which is the Group's functional and presentation currency. b) Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at the year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. c) Group companies The results and financial position of all the Group entities that have afunctional currency different from the presentation currency are translated intothe presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated atthe closing rate at the date of the balance sheet and gains or losses are dealtwith separately in the balance sheet; (ii) income and expenses for each income statement are translated at the averageexchange rate prevailing in the period and gains or losses are dealt with in theincome statement. The exchange differences arising on the translation are taken directly to aseparate component of equity. On disposal of a foreign entity, the deferredcumulative amount recognised in equity relating to that particular foreignoperation is recognised in the income statement. 2.10 Segmental reporting The Directors consider that the Group is at present engaged in a single segmentof business being the property investment and development business and that theregion in which the Company operates is sufficiently homogenous bothgeographically and economically so as to make a segmental analysis unnecessary. 2.11 Estimates In the process of applying the Company's accounting policies described above,management is required to make certain judgements and estimates to arrive atfair carrying values for its assets and liabilities. Significant areas requiringmanagement's judgement include assessment of the fair value of investmentproperties and properties under construction as described above. 2.12 Impairment of non-financial assets The Company assesses at each reporting date whether there is an indication thatan asset may be impaired. If such indication exists, or when annual impairmenttesting for an asset is required, the Group estimates the asset's recoverableamount. An asset's recoverable amount is the higher of an assets fair value lessthe cost of selling the asset and its value in use. Where the carrying amount ofan asset exceeds its recoverable amount, the asset is considered impaired and iswritten down to its recoverable amount. In assessing value in use the Companyrelies on independent valuers. 2.13 Share based payment transactions Equity-settled share-based payments to service provider is measured at the fairvalue of the equity instruments as set out in note 2.14. The cost of equity-settled transactions is recognised, together with acorresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevantservice provider become fully entitled to the award ("the vesting date"). The dilutive effect of outstanding options is reflected as additional sharedilution in the computation of earning per share. 2.14 Share-based payments Metro Capital Management AS ("Manager") are entitled to receive up to 100 percent (but not less than 25 per cent) of their Performance Fee in new OrdinaryShares of Metro Baltic Horizons plc under certain circumstances (the "Performance Fee Shares"). The price of the Performance Fee Shares to be issued to the Manager, if any, arecalculated by reference to the average closing price of the Ordinary Shares forthe last 20 days of trading in the accounting period to which the PerformanceFee is payable, provided that, if such average price when calculated is lowerthan the most recently published Net Asset Value per Ordinary Share, PerformanceFee Shares shall not be issued but the relevant part of the Performance Feeshall be paid to the Manager in cash and the Manager shall apply such cash inacquiring (within 30 days, to the extent reasonably practicable and having usedreasonable endeavours so to do) Ordinary Shares in the market having anaggregate value equal to such relevant part of the Performance Fee, providedfurther that, if within such 30 day period, the Manager is unable to buy suchnumber of Ordinary Shares as equals, at the purchase price, the full amount ofsuch relevant part of the Performance Fee, the Company shall issue to theManager, in respect of the balance, Performance Fee Shares at the Net AssetValue per Ordinary Share as most recently published immediately before the endof such 30 day period. As the Net Asset Value per Ordinary Share at 31 December 2007 was in excess ofthe average price calculated under the above formula the Company expects to paythe Performance Fee in cash and the Manager has undertaken to purchase shares inthe market to a value of at least 25 per cent of the Performance Fee. 3. Administrative Expenses Administrative expenses include the following 31 December 2007 Group •'000 Investment Management Fees 672Performance Fees 475Directors' Remuneration 86Auditors' Remuneration - audit services 83Other administrative expenses 322 _______ 1,638 ====== Management Fees are 1.5% per annum of gross assets under management in Russiaand 1% per annum of all other gross assets. The Management Fees are calculatedand charged quarterly based on the gross assets of the Company at the end of thequarter. Performance Fees are calculated based on the audited net asset value at 31December each year and are payable annually. The Performance Fee is calculatedas 25% of the increase in the Net Asset Value of the Company in excess of ahurdle rate of 12% over the period. Fees of €99,000 were also paid to the auditors for their work as reportingaccountants on the launch of the Company. These costs are included within thecost of the issue of shares. 4. Finance Income 31 December 2007 Group •'000 Interest received on short term deposits 869 ______Finance Income 869 ===== 5. Tax Charge 31 December 2007 Group •'000 Accrued income tax expense (1)Reduction in deferred tax liability 155 ______Tax credit for the period 154 ===== 6. Earnings per share Basic earnings per share The calculation of basic earnings per share at 31 December 2007 was based on theprofit attributable to shareholders of €6,717k and on the weighted averagenumber of Ordinary Shares in issue during the period ended 31 December 2007 of26,200,270. 31 December 2007 Group •'000 Basic earnings per share Profit attributable to ordinary shareholders 6,474 _______Weighted average number of ordinary shares in issue during the period 26,200,270 Basic earnings per share (expressed as cents per share) 24.71 Diluted earnings per share Weighted average number of Ordinary Shares in issue during the period 26,200,270 Maximum shares which may be issued to Metro Frontier Ltd in respect of their success fee 331,929based on the Net Asset Value at 31 December 2007 ________Diluted weighted average number of ordinary shares in issue 26,532,199 Diluted earnings per share (expressed as cents per share) 24.40 7. Investments Investment property & property held for construction and development Investment Construction & Total Property Development •'000 •'000 •'000 At 18 September 2006 - - -Properties acquired 43,245 15,978 59,223Revaluation of properties (257) 2,388 2,131Exchange gains or losses - (954) (954)Investment in properties 3,436 - 3,436 _______ _______ _______At 31 December 2007 46,424 17,412 63,836 ====== ====== ====== Investments in subsidiaries 31 December 2007 Company •'000 Loans to subsidiaries 36,895 _______Total investments in subsidiaries 36,895 ====== 8. Trade and other receivables and amounts due from Group companies 31 December 31 December 2007 2007 Group Company •'000 •'000 Accrued interest income 7 -Prepayments 33 18Other receivables 472 - _______ _______Total trade and other receivables 512 18 ====== ====== Interest due from Group companies - 1,012 _______ _______Amounts due from Group companies - 1,012 ====== ====== 9. Cash and cash equivalents 31 December 31 December 2007 2007 Group Company •'000 •'000 Sterling cash 178 134Euro cash 350 217Rouble cash 42 -Dollar cash 104 -Estonian cash 49 -Latvian cash 11 - Euro deposits 678 -Estonian deposits 2,000 _______ _______Total cash and cash equivalents 3,412 351 ====== ====== 10. Bank Loans 31 December 31 December 2007 2007 Group Company •'000 •'000 At 18 September 2006 - - Bank loans acquired as part of acquisitions 5,659 -Bank loans repaid (3,459) -New bank loans 6,511 _______ _______At 31 December 2007 8,711 - ====== ====== Group interest bearing and non-interest bearing loans at 31 December 2007 Current Loan Interest Rate Maturity Amount SEB Latvijas Unibanka - Euro Libor +1.95% 15/6/2008 1,300Sampo Banka - Euro Libor +1.95% 15/6/2008 900SEB Latvijas Unibanka - Euro Libor +1.9% 31/8/2008 210 ______ 2,410 =====Non-current Loan Interest Rate Maturity Amount Sampobank - Euro Euribor +1.0% 3/10/2017 6,301 ______ 8,711 ===== Bank Loans are secured against property held in the relevant subsidiary andthere are no cross guarantees between Group companies. 11. Other Loans Metro Baltic Horizons plc holds less than 100% of the issued share capital incertain subsidiaries. These subsidiaries are part funded by loans from allshareholders including the minority shareholders. These loans are made onsimilar terms to the intercompany loans and are not callable by the minorityshareholders. 12. Deferred Tax 31 December 31 December 2007 2007 Group Company •'000 •'000 At 18 September 2006 - -Acquired with subsidiaries 8,205 -Deferred tax on revaluations 374 - _______ _______Total deferred tax 8,579 - ====== ====== 13. Trade and other payables 31 December 31 December 2007 2007 Group Company •'000 •'000 Directors' fees 19 19Management fees 100Performance fees 475 -Other trade payables 673 -Other accruals 102 63 _______ _______Total trade and other payables 1,369 82 ====== ====== 14. Issued Capital 31 December 2007 Number of shares •'000 AuthorisedOrdinary Shares of €0.01 250,000,000 2,500 ========= ====Issued and fully paidOrdinary Shares of €0.01 26,200,270 262 ========= ==== Two shares were issued on 18 September 2006 on incorporation. 26,200,268 shareswere issued on 11 December 2006 for the total proceeds of €38,775,000. TheOrdinary Shares carry the right to receive, and shall participate in, anydividends or other distributions out of the profits of the Company available fordividend and resolved to be distributed in respect of any accounting period. 15. Share Premium •'000Share premium on Ordinary Shares issued 38,513Issue costs paid on Ordinary Share issued (2,327)Transfer to Distributable Reserves (36,186) _______At 31 December 2007 - ====== By virtue of a special resolution passed on 5 December 2006 with confirmation ofthe court of the Isle of Man on 13 August 2007, the amount standing to thecredit of the Share Premium Account was transferred to a Distributable Reserveand the Share Premium Account was cancelled. 16. Net Asset Value per share 31 December 2007 Group •'000 Net Asset Value attributable to Ordinary Shareholders 45,124 Deferred tax 8,579 ______ Net Asset Value excluding deferred tax 53,703 ===== Net Asset Value per share including deferred tax (cents per share) 1.72 Diluted Net Asset Value per share (cents per share) 1.70 Net Asset Value excluding deferred tax (cents per share) 2.05 Ordinary Shares in issue at the end of the period 26,200,270 Diluted Ordinary Shares in issue at the end of the period 26,532,199 17. Notes to the cash flow statement 31 December 31 December 2007 2007 Group Company •'000 •'000Cash generated from operations Operating profit for the period 5,619 (76) Adjustment for:Changes in creditors (1842) 82Changes in debtors (364) (17)FX gain on land and investment property (187) -Revaluation of land & buildings (6,630) - ______ ______ Cash flow from operations (3,404) (11) ===== ===== 18. Financial Instruments and Property The Group holds cash and liquid resources as well as having debtors andcreditors that arise directly from its operations. The main risks arising from the Group's financial instruments and properties aremarket price risk, credit risk, liquidity risk, foreign exchange risk andinterest risk. The Board regularly reviews and agrees policies for managing each of these risksand these are summarised below. Market Price Risk The Group's exposure to market price risk is comprised mainly of movements inthe value of the Group's investment in property. Properties are inherentlydifficult to value due to the individual nature of each property. As a resultvaluations are subject to uncertainty. There is no assurance that the estimatesresulting from the valuation process will reflect the actual sales price evenwhere a sale occurs shortly after the valuation date. Rental income and the market value for properties are generally affected byoverall conditions in the local economy, such as growth in gross domesticproduct, employment trends, inflation and changes in interest rates. Changes ingross domestic product may also impact employment levels or levels of commercialactivity, which in turn may impact the demand for premises. Furthermore,movements in interest rates may also affect the cost of financing for realestate companies. Both rental income and property values may also be affected by other factorsspecific to the real estate market, such as competition from other propertyowners, the perceptions of prospective tenants of the attractiveness,convenience and safety of the properties, the inability to collect rents becauseof the bankruptcy or the insolvency of tenants or otherwise, the periodic needto renovate, repair and release space and the cost thereof, the costs ofmaintenance and insurance, and increased operating costs. The Directors monitor market value by having independent valuations carried outsemi annually. Credit Risk Credit risk is the risk that an issuer or counterparty will be unable orunwilling to meet a commitment that it has entered into with the Group. In theevent of a default by an occupational tenant, the Group will suffer a rentalincome shortfall and incur additional costs including legal expenses inmaintaining, insuring and re-letting the property. Liquidity Risk Liquidity risk is the risk that the Group will encounter in realising assets orotherwise raising funds to meet financial commitments. Investments in property are relatively illiquid. However, the Group has tried tomitigate this risk by investing in properties in good locations. The Group'sobjective is to maintain a balance between continuity of funding and flexibilitythrough use of long term borrowing to finance the acquisition of properties. Foreign Exchange Risk In all of the regions in which the Group operates, with the exception of Russia'assets and liabilities are denominated in Euro. In Russia the assets and incomeare typically denominated in US dollars. To mitigate the foreign exchange risk,the Group will typically arrange its bank funding in the same currency in whichthe assets are denominated. At this point, the Company has decided not to engagein foreign currency hedging or other derivative instruments to further reducethis risk. Interest Rate Risk The interest rate profile of the Group at 31 December 2007 was as follows: Total Fixed Variable Non interest Weighted Rate Rate Bearing Avg. Rate •'000 •'000 •'000 •'000 % Development properties 63,836 - - 63,836 -Debtors and other assets 537 - - 537 -Cash and equivalents 3,412 - 3,412 - 3.9% ______ ______ ______ ______Total assets as per 67,785 - 3,412 64,373Balance Sheet ===== ====== ====== ====== Total Fixed Variable Non interest Weighted Rate Rate Bearing Avg. Rate •'000 •'000 •'000 •'000 % Bank loans 8,711 - 8,711 - 6.5%Minority loans 3,809 - - 3,809 -Creditors 1,369 - - 1,369 -Deferred tax 8,579 - - 8,579 - ______ ______ ______ ______Total liabilities as per 22,468 - 8,711 13,757Balance Sheet ===== ====== ====== ====== 19. Subsidiaries The following were the companies in the Group at 31 December 2007: Name Securities in issue Principal activity Country of Beneficial incorporation Interest Metro Baltic Guernsey 2 shares of €1 each Intermediate holding Guernsey 100%ltd. company Pedragon Investments 2,000 shares of €1 Intermediate holding Cyprus 100%ltd. each company Metro Baltic Netherlands 18,000 shares of €1 Non trading Netherlands 100%B.V. each Goldbrick Investments 2,000 shares of €1 Non trading Cyprus 100%ltd. each Focus Kinnisvara OU 1 share of EEK 40,000 Development company Estonia 100% OOO Gruppa Kub 1 share of RUB 10,000 Development company Russia 100% SIA D Tilts Holdings 100 shares of LVL 27 Intermediate holding Latvia 80% each company SIA El Mart 20 shares of LVL 100 Development company Latvia 80% each OU Pirita tee 26 1 share of 8000 EEK Development company Estonia 80% and 1 of 32,000 EEK 20. Acquisitions of subsidiaries The Group has made four significant acquisitions during the period: Company acquired Percentage acquired Date Acquired OOO Gruppa Kub 100% 29 May 2007Focus Kinnisvara 100% 30 June 2007SIA D Tilts Holdings 80% 30 June 2007OU Pirita tee 26 80% 31 August 2007 These transactions have been accounted for using the purchase method ofaccounting. Book Value Fair Value Fair Value Adjustments •'000 •'000 •'000Net assets acquired:Property 34,642 24,581 59,223Trade and other receivables 124 - 124Cash and bank balances 3,140 - 3,140Bank loans (5,659) - (5,659)Other loans (8,801) - (8,801)Deferred tax (2,426) (5,778) (8,204)Trade and other payables (4,846) - (4,846)Loan certificates (10,772) - (10,772) _______ _______ _______ 5,402 18,803 24,205 ====== ======Minority interest (161) _______Fair value of assets acquired: 24,044 Excess of fair value over purchase price (6,887) _______Total consideration 17,157 ======Satisfied by:Cash 17,048Directly attributable transaction costs 109 _______ 17,157 ======Net cash outflow arising on acquisition:Cash consideration 17,157Less cash acquired (3,140) ______Net cash consideration 14,017 ===== 21. Employees At 31 December 2007 the Group had 48 employees. The average number of employeesfor the period from incorporation to 31 December 2007 was 28. 22. Related party transactions Transactions between the Company and its subsidiaries which are related partieshave been eliminated on consolidation and are not disclosed in this note. As disclosed in note 3 the Investment Managers management fee from incorporationto 31 December 2007 was €672k. There is a further performance fee of €475k. The Investment Manager has the option to take some or all of the Performance Feein ordinary shares of the Company. At a minimum 25% of the Performance Fee willbe satisfied through the issue of Ordinary Shares in the Company (or in certaincircumstances through the acquisition of the shares in the market by theInvestment Manager). In addition two of the acquisitions completed by theCompany during the period related to properties which a company connected to theInvestment Manager was managing on behalf of third party investors. Theseacquisitions were negotiated and completed on the basis of independent marketvaluations prepared by Colliers International for the Board. Both of theacquisitions were in line with the Company's stated investment criteria. 23. Commitments The Group has entered into a number of construction related contracts through anumber of its operating subsidiaries. Total commitments under existing contractsare estimated as follows: Subsidiary Total 0-12 Months 13-24 Months >24 Months Focus Kinnisvara OU €12.8m €12.0m €0.8m - SIA D Tilts Holdings €2.7m €1.5m €0.6m €0.6m OOO Gruppa KUB €2.7m €1.7m €1.0m - ______ ______ ______ ______Total €18.2m €15.2m €2.4m €0.6m ====== ====== ====== ====== 24. Subsequent events Since the balance sheet date the Group has transferred the assets of OOO GruppaKub to another group company Goldbrick Investments ltd. This information is provided by RNS The company news service from the London Stock Exchange

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