9th Mar 2015 07:00
Raven Russia Limited ("Raven Russia" or the "Company")
Results for the year ended 31 December 2014
The Board of Raven Russia releases the results for the year ended 31 December 2014.
Highlights
· NOI up to $192million from $187million;
· Underlying Earnings up 11% to $66.7million;
· Property revaluation losses give an IFRS loss of $88.2million;
· Investment Portfolio increases to 1.5million sqm;
· 94% occupancy at the year end including new space delivered;
· $247million of free cash at today's date;
· Final distribution of 3.5p proposed giving an increase for the year of 20% to 6p;
· Distribution by tender offer buyback of 1 in every 14 shares at 48 pence per share.
Chairman Richard Jewson said "We have done well to mitigate the effects on our business of the various macroeconomic and geopolitical uncertainties facing the Russian economy. We are strong financially and are well-placed to benefit from any economic recovery."
Enquiries
Raven Russia Limited Tel: + 44 (0) 1481 712955
Anton Bilton
Glyn Hirsch
Novella Communications Tel: +44 (0) 203 151 7008
Tim Robertson
Ben Heath
N+1 Singer Tel: +44 (0) 20 7496 3000
Corporate Finance - James Maxwell
Sales - Alan Geeves / James Waterlow
Barclays Bank Plc Tel: +44 (0) 20 7623 2323
Tom Boardman / Tom Macdonald
This announcement contains forward-looking statements that involve risk and uncertainties. The Group's actual results could differ materially from those estimated or anticipated in the forward-looking statements as a result of many factors. Information contained in this announcement relating to the Company should not be relied upon as a guide to future performance.
About Raven Russia
Raven Russia was founded in 2005 to invest in class A warehouse complexes in Russia and lease to Russian and International tenants. Its Ordinary Shares, Preference Shares and Warrants are listed on the Main Market of the London Stock Exchange with a market capitalisation of approximately £325 million. The Company operates out of offices in Guernsey, Moscow and Cyprus and has to date completed a portfolio of circa 1.5million square metres of Grade "A" warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk. For further information visit the Company's website: www.ravenrussia.com
Chairman's Message
I concluded my message in the 2013 Annual Report with the hope that the events in Ukraine would soon settle peaceably. Unfortunately, 12 months later, it remains headline news and has now been joined by an unforeseen and rapid drop in both the oil price and the Rouble.
The positive news is that our operating results for 2014 have exceeded our expectations given the international sanctions that have been in place for the majority of the year. Underlying earnings have increased from $60million to $67million, our investment property portfolio was virtually fully let throughout the year, our weighted average term to debt maturity is now 4.8 years and our weighted average lease term is 4.2 years. At today's date, we have $247million of free cash, the majority held in the Guernsey holding companies.
Unfortunately and inevitably, the geopolitical events and resulting depreciation of the Rouble at the year end have affected our balance sheet. Investment property and property under construction valuations have decreased by $145million (2013: increase of $55million) and the US Dollar equivalent value of our Rouble denominated assets by $45million. This has resulted in an IFRS loss after tax for the year of $88million (2013: loss of $4million) and a fully diluted, adjusted net asset per share of 106cents (2013: 126cents).
Despite the prevailing negative sentiment on Russia, we have been able to refinance $275million of our debt during the year, reducing our overall cost of debt from 7.2% to 7.0%. Since the year end, we have also drawn a further $66million on existing facilities, a significant achievement in the current market.
Our proposed final distribution, equivalent to 3.5 pence per share, makes a total of 6 pence per share for 2014, a 20% increase on 2013 and reflects the successful operating results in the year. Again, we intend to distribute by way of a tender offer buyback of 1 in every 14 ordinary shares at 48 pence per share.
The current year will be an important one for Raven Russia. We have made every effort to mitigate the effects on our business of the various macroeconomic and political events facing the Russian economy and we will continue to do so. We are naturally cautious on the outlook for the current year and the significant uncertainties regarding Ukraine, the oil price and the currency. We are strong financially, with an effective local management team in Russia and are well-placed to benefit from any economic recovery.
As always, I would like to thank our shareholders, employees, advisers and all of our stakeholders for their continued support in a challenging period.
Richard Jewson
Chairman
8 March 2015
Strategic Report
Chief Executive's Report
In many ways 2014 has been a good year.
The portfolio of 1.5million sqm is 94% let, securely financed and we have significant free cash at holding company level. Our operating performance has been excellent although our balance sheet has suffered from the effects of the weak Rouble at the year end.
Our underlying earnings have risen to $67million, up 11% from $60million in 2013.
We have $247million of free cash at today's date, a level we believe is prudent in these uncertain times.
Inevitably, property valuations and the US Dollar value of our Rouble denominated assets have suffered in this difficult environment and year end adjusted fully diluted NAV per share was 106cents (2013: 126cents). With no investment transactions and continuing uncertainty it is hard to predict where valuations might go next and we remain cautious.
All of our progress in 2014 is overshadowed by the very difficult economic and geopolitical issues Russia is facing and how they will impact on our future prospects.
Whilst the vast majority of our leases are contracted in US Dollars, our tenants will typically have Rouble revenues. Some of our tenants are suffering and we will work with those who really need help and who recognise it is a reciprocal arrangement. Rouble rents are not out of the question provided this can be justified by other contractual terms, including lease term, indexation and covenant.
Our long term strategy is unchanged and we still believe that our high quality portfolio in a structurally undersupplied market can generate attractive returns. The problem is that the long term now looks further away and so our key objective is to make sure we are ready when it eventually arrives.
As you would expect, we have put any immediate acquisition plans on hold. We will not be starting any further speculative property development and our focus is on conserving our cash and managing our existing portfolio efficiently and effectively.
With a final tender offer distribution of 3.5p the distribution for the year is 6p, a 20% increase over 2013. To save cash we will not be offering an option to oversubscribe for more than each shareholder's pro rata entitlement.
Given future uncertainty it seems unlikely that the rising distribution trend we had developed will continue until we can see how all of the current uncertainties unfold. Whilst we want to make distributions to shareholders when we can we have to maintain a reserve of cash to deal with the uncertainties we will face.
We will manage our relatively simple business effectively and will keep our distribution policy under constant review. This is disappointing given our progress and we look forward to the eventual recovery when we will benefit from the high quality portfolio we have created.
Glyn Hirsch
Chief Executive Officer
8 March 2015
Business Model
Our Strategy
Our strategy is simple: to build an investment portfolio of Grade A logistics warehouses in Russia that delivers progressive distributions to our shareholders.
We have had success in implementing this strategy in the last four years after the hiatus of 2009 and 2010. However, the combination of the political and economic pressures on Russia, culminating in the rapid depreciation of both the oil price and the Rouble in the last four months, means that we have entered another period of caution.
The difference between the position today and at the end of 2008 is that we have a high occupancy, completed investment portfolio, very little development exposure and a strong balance sheet with high levels of free cash.
The logistics market in Russia remains undersupplied, even without a buoyant economy. Our objective in the medium term is to secure the position we have in the market and be well placed to take opportunities as and when we come out of the problems of the current cycle.
Business Model
Our business model has adapted over time, from one initially focussed on deploying our equity in forward funding construction projects with local joint venture developers, to a geared development model with in house construction project management. The bulk of our investment portfolio was completed in 2009 and we entered into a sustained period of letting activity. Today, we are a maturing investment property group with a focus on growth through proactive asset management, organic development projects and acquisitions.
Our tenants are a mixture of large, local and international businesses: retailers; distributors; manufacturers; and large, third party logistics providers. Where possible, we look to partner tenants to assist in their growth, the development at Noginsk over the last three years being a good example, with high specification developments completed for large Russian retailers.
The current market conditions mean that any potential development projects and acquisitions have been put on hold and asset management of the investment portfolio is our primary focus. In particular, the letting of vacant space and dealing with lease maturities arising in 2015/16 in the context of depressed market rental levels combined with addressing the pressure on certain tenants caused by the weakened Rouble.
Key Performance Indicators (KPIs)
The opportunity of high, US Dollar denominated yield attracted us to this market and our KPIs are yield and shareholder distribution focussed. Our results are driven by increasing rental income and NOI performance, underpinned by the portfolio ERV and vacancy rates.
Our central overheads are reasonably stable and can support more growth. We focus on measurements that reflect our ability to pay cash covered distributions, principally underlying earnings and operating cash flows after interest. The latter forms the key measurement in our incentive plan targets.
We have struggled to find comparable indices for our stock. The Russian property sector is dominated by developers and we do not know of any similar investment companies in our part of the property universe. Similarly, comparing ourselves to UK REITs does not work given the disparity in metrics.
However, we have shown a comparison of our total shareholder return over the last 5 years to both the FTSE Small Cap and FTSE 350 indices later in the Annual Report, which shows a significant outperformance over that period until the impact of the low oil prices and Rouble depreciation at the year end.
Portfolio Review
Geographical
Warehouse | Moscow | St Petersburg | Regions |
Space (000 sqm) | 1,073 (73%) | 184 (12%) | 220 (15%) |
Annualised NOI (US$m) | 145.2 (74%) | 22.9 (12%) | 27.1 (14%) |
Office | Moscow | St Petersburg | Regions |
Space (000 sqm) | - | 16 (100%) | - |
Annualised NOI (US$m) | - | 4.1 (100%) | - |
2014 was a year when our long term strategy of investing in the best assets and leasing them to strong tenants enabled us to remain virtually fully let. We began and ended the year with a vacancy rate of just 3% on a like for like basis. At the year end we delivered 107,000sqm of new space at our Noginsk and Nova Riga projects in Moscow, which is already 56% let to large Russian and international tenants. This new space increased our vacancy in the portfolio to 6% at 31 December 2014. Contracted NOI is now $185.3million, increasing to $199.3million including LOIs and PLAs, with the potential to rise further to $209million if the vacant space leases up. The reality today is that our primary objective for 2015 and 2016 is to maintain the cashflow we have in a market which has been hit by Rouble depreciation and a record delivery of new space.
Portfolio lease expiries and breaks
Lease expiries (US$m) | Lease expiries (000 sqm) | |
2015 | 17 | 140.0 |
2016 | 42 | 323.2 |
2017 | 31 | 207.1 |
2018 | 14 | 101.8 |
2019-2023 | 81 | 563.8 |
Total | 185 | 1,335.9 |
During 2015 we have 140,000sqm of lease expiries reflecting the defensiveness of our portfolio in the short term. Looking further ahead this number increases to 323,200sqm in 2016. There are no break clauses outstanding at the year end. Our strategy is to renew these leases at the earliest opportunity to de-risk the portfolio.
Portfolio yields
Warehouse | Moscow (%) | St Petersburg (%) | Regions (%) |
2013 | 10.7 - 12.8 | 12.1 - 12.5 | 12.0 - 12.5 |
2014 | 12.0 - 12.5 | 13.25 | 14.5 |
Valuation in the current environment is a challenging exercise as there is very little evidence to help the valuers reach their conclusion. Buyers have of course been put off by the geopolitical and economic issues, but we are not seeing any distress as most owners and developers in our sector are not over leveraged forcing them to sell. That means yields have moved out by around 100-150 bps in Moscow to 12-12.5%, to 13.25% in St Petersburg and 14.5% in the regions. Oversupply and Rouble weakness has hit rents in the second half of the year with ERVs falling by $10-15 per sqm. However, because our portfolio is generally well let on long term leases the impact of ERV change is not as dramatic on valuations as it otherwise would have been.
Our investment properties were valued by Jones Lang LaSalle ("JLL") at the period end, in accordance with the RICS Valuation and Appraisal guidelines, and are carried at a market value of $1.6billion (see note 11 to the financial statements). This resulted in a decrease of $133million in portfolio value since 2013, reflecting the increase in yields and the reduction in ERVs, partly offset by a revaluation uplift on our new developments at Nova Riga and Noginsk in Moscow.
Investment Portfolio
Letting in the year
Warehouse | New Lettings | Breaks/Maturities | Expansion | Lease Renewals | Net New Lettings |
Moscow | 9,145 | (38,572) | - | 21,711 | (7,716) |
St Petersburg | 2,660 | (8,846) | - | 8,846 | 2,660 |
Regions | - | (10,369) | 2,390 | 9,190 | 1,211 |
11,805 | (57,787) | 2,390 | 39,747 | (3,845) |
This letting table shows the activity during the year following 2014 breaks and maturities.. This does not include the letting activity on the new space at Noginsk and Nova Riga where 59,764sqm of PLAs and LOIs have been signed. In addition, all breaks for 2015 have lapsed and terms on 75,000sqm of 2015 maturities have been agreed to date
Moscow
In Moscow we have nine projects totalling 1,073,000sqm, producing an annualised income of $145.2million at the year end. Following the completion of new space at Noginsk and Nova Riga at the year end, there is 82,000sqm of vacant space. In the last quarter of 2014 market rents fell on Rouble weakness and over supply in some areas of the market.
Moscow Portfolio
Warehouse complex | Space (000 sqm) | Annualised NOI (US$m)* |
Pushkino | 213.6 | 24.8 |
Istra | 205.3 | 27.7 |
Noginsk | 199.9 | 33.8 |
Klimovsk | 157.6 | 23.0 |
Krekshino | 117.7 | 17.7 |
Nova Riga | 67.4 | 3.1 |
Lobnya | 52.2 | 7.1 |
Sholokhovo | 45.2 | 6.1 |
Southern | 14.1 | 1.9 |
*Includes LOIs and PLAs
At Noginsk we have completed a further 39,284sqm for Dixy, the leading Russian retailer, who has recently taken occupation of the building and are contracted to sign a 15 year lease at an annual rent of $8.5million.
At our new project in Moscow at Nova Riga we have completed the first phase of 67,388sqm together with the associated infrastructure for the majority of the project. We have signed PLAs with Azbuka Vkuza and Pernod Ricard for 20,480sqm in total.
St Petersburg
St Petersburg Portfolio
Warehouse complex | Space (000 sqm) | Annualised NOI (US$m)* |
Shushary | 147.3 | 18.3 |
Pulkovo | 36.7 | 4.6 |
Office | ||
Konstanta | 15.8 | 4.1 |
*Includes LOIs and PLAs
In St Petersburg, the market has also been affected by the current situation, although we ended the year with only 3,291sqm vacant. During the year, we invested circa $7million on a spare land plot to create new truck parking and ancillary facilities for Dixy, which they have leased until 2023 at a rent of $1.3million per annum.
Regions
Regional Portfolio
Warehouse complex | Space (000 sqm) | Annualised NOI (US$m) |
Novosibirsk | 119.7 | 14.8 |
Rostov | 100.3 | 12.3 |
In Rostov we have remained 95% let, although our focus is now on the lease expiries in 2016, where we are in active discussions with a number of our larger tenants about lease extensions or build to suit facilities on the additional land we hold.
In Novosibirsk vacancy was virtually unchanged although we relet 9,700sqm which became vacant and a further 2,400sqm of space to a tenant for expansion
Tenant Mix
Warehouse Tenant Type | Distribution | Retail | Manufacturing | Third Party Logistics operators |
Space (000 sqm)
|
276.6 (20%) |
400.7 (29%) |
166.1 (12%) |
535.7 (39%) |
Our diverse, but quality tenant base should help to protect us in the current year. The sector hardest hit by the rapid Rouble depreciation in the second half of the year appears to be the third party logistic operators for whom rent is a large proportion of their cost base. This represents 39% of our tenants with a weighted average unexpired lease term of 4 years. 76% of this figure comprises DHL, Itella, DSV, Kuhne and Nagel and our own subsidiary Roslogistics who all have the financial strength to meet their rental obligations.
Given the current situation in Russia, an international business that had a nascent plan for entering the Russian market has probably put that on ice, but those who are already here seem willing to commit for the medium term as is evidenced in our own portfolio with the likes of Bacardi signing lease extensions in Moscow since the year end. As a tenant, if you are in Russia, trading margins and volumes may be down in 2015 but the fundamental characteristics of the country still look attractive for many of our tenants.
Land Bank
Location | Property / Warehouse Complex | Land plot size (ha) | |
Additional phases of completed property | Moscow
Regions
| Noginsk Nova Riga
Rostov-On-Don | 26 25
27
|
Land bank |
St Petersburg
Regions |
Pulkovo
Chelyabinsk Omsk Omsk 2 Ufa Novgorod |
10
59 19 9 48 44
|
Total | 267 |
We completed the construction of 107,000sqm during the year at Noginsk and Nova Riga in Moscow. In the current market it is unlikely we will undertake any further speculative development although, we hold another 26 ha at Noginsk on which we can build 134,000sqm and at Nova Riga there is the potential to add a further 130,000sqm on the additional 25 ha we own.
Demand in the regional cities across Russia has reduced dramatically and as a result we have reassessed the carrying values for the regional land bank, reducing them from $22.6million to $3.2million, after the effects of Rouble depreciation and including writing off the value of our holdings in Ufa and Chelyabinsk where our development leases expire in 2018. The development lease at our site in Saratov lapsed during the year and we have not renewed this. It is clear regional development will take some time to recover and where possible we will seek alternative uses for our sites.
The Market
Landlords, developers, banks and tenants are all in search of the "new normal" following six months of turbulence. In Moscow new supply rose by 1.6million sqm during 2014 with take up decreasing to circa 860,000sqm according to JLL. They also estimate the year end vacancy rate in Moscow at 7.9%.
It is clear that the depreciation of the Rouble against the US Dollar has made rents more expensive for tenants, many of whom had not hedged their US Dollar exposure. This has led to a raft of requests to renegotiate rents. Some developers have also delivered large schemes into a falling market and in certain locations there is a lot of competition for tenants. There is however, a two tier market: that for vacant space, where developers are competing for tenants very aggressively; and the lease renewal market. The latter is somewhat different, and whilst tenants are seeking competitive rents, the cost and aggravation of moving, training new staff and disruption to the supply chain is such that better rents can be achieved. Many developers with vacant space today are offering Rouble rents and this is something we will do in the short term providing we also get the benefit of annual Rouble indexation alongside an appropriate lease term and covenant.
Supply is expected to continue to rise over the first half of 2015 in Moscow as schemes already started are brought to the market. By the end of 2015 we expect take up to have eroded the amount of vacant space leaving the vacancy rate at around 5.5%. Looking further ahead into 2016 we do not expect much new supply. Development finance simply is not available and with rents where they are, it does not make sense, currently, to build speculatively even after allowing for the fall in construction costs in US Dollar terms. If there is continued demand and the stranglehold on supply caused by lower rents and the lack of finance remains, then the market could quickly swing back into equilibrium and even to an undersupply by the end of 2016.
Investment volumes fell from $8.1bn in 2013 to $3.5bn in 2014 according to JLL, caused by the uncertain geopolitical and economic outlook. Approximately 76.2% of this investment was from Russian sources. Yields have also moved out as demonstrated by our valuations. Comparatively, yields for warehouses in Athens are 10.5%, Brazil 10.5% and China 7.5%. Russia still looks good value in that context. The cost and availability of investment and development finance has changed as banks both local and international are more risk conscious and dealing with sanctions. This is likely to reduce development (a good thing) but also restrict investment (not so good) over the next year.
2015 will be all about collecting rent, minimising vacant space and tenant retention. If we can get these three things right we will be well placed in 2016 when the market looks like it could be better balanced.
Finance Review
Our results for the year show a very distinct split. Operating results for the year have met expectation but the impact of the rapid depreciation of the Rouble over the year end has hit the US Dollar value of our closing balance sheet.
The comparison of our key performance indicator of Underlying Earnings to IFRS earnings demonstrates the impact.
Underlying Earnings | 2014 | 2013 |
(Adjusted non IFRS measure) | $'000 | $'000 |
Net rental and related income | 192,317 | 186,504 |
Administrative expenses | (26,967) | (25,925) |
Foreign exchange losses | (15,471) | (1,893) |
Share of profits of joint ventures | 955 | 2,717 |
Operating profit | 150,834 | 161,403 |
Net finance charge | (75,707) | (91,436) |
Underlying profit before tax | 75,127 | 69,967 |
Tax | (8,475) | (9,716) |
Underlying profit after tax | 66,652 | 60,251 |
Basic underlying earnings per share (cents) | 9.32 | 10.92 |
With our investment portfolio running at 97% let for the year, like for like, our net rental and related income increases from $187million in 2013 to $192million in 2014. There were no significant tenant maturities in the year, potential acquisition projects were put on hold in the last quarter and the two new construction projects completed at the end of the year and so were not income generating in the period.
General underlying administrative expenses have increased from $26million to $27million. The element relating to the property investment portfolio (see note 4 to the financial statements) was $16.7million (2013: $16.0million) and central overheads were $6.9 million (2013: $6.1million).The majority of the increase was due to the relative strength of Sterling to US Dollar over the year compared to 2013.
Foreign exchange movements in underlying earnings relate to the increase in the Rouble equivalent of US Dollar net liabilities on our property owning Rouble balance sheets at the year end. The largest translation movement was a $25million loss relating to the carrying value of US Dollar tenant deposits held. As these are converted to US Dollars at the time of receipt, the cashflow impact of the exchange loss to the group would be neutral if repayment of deposits was to crystalise at the balance sheet value. This has been offset by a $10million gain on US Dollar cash reserves held in the Russian operating companies.
Underlying operating profit before foreign exchange movements was $166.3million (2013: $163.3million). This compares to our operating cash inflow of $168.8million (2013: $192.3million). 2013 included one off proceeds from the sale of Raven Mount stock of $13million, distributions from the Lakes joint venture of $8milion and increased rents received in advance of $11million. The latter reduced this year as tenants were uncertain of where the Rouble rate was going to settle over the year end and delayed payment until the due date.
Our bank interest expense including amortised costs (note 7) increased to $67.7million (2013: $63.2million) following refinancings completed during the year and our preference share expense almost halved to $20million (2013: $38.3million) following the conversion exercise at the end of 2013. The underlying net finance expense for the year was $75.7million (2013: $91.4million).
Underlying profit after tax increased to $66.7million (2013: $60.3million). The foreign exchange movement caused by the year end Rouble depreciation has offset the saving on the preference share coupon following the conversion at the end of last year. Basic underlying earnings per share is 9.32cents (2013: 10.92cents) with the increased number of ordinary shares in issue following the preference share conversion at the end of 2013.
IFRS Earnings | 2014 | 2013 |
$'000 | $'000 | |
Net rental and related income | 192,308 | 186,439 |
Administrative expenses | (34,630) | (27,944) |
Share based payments | (2,354) | (7,634) |
Foreign exchange losses | (15,471) | (1,893) |
Share of joint venture profits | 955 | 2,717 |
Operating profit | 140,808 | 151,685 |
(Loss)/profit on revaluation | (145,404) | 55,268 |
Net finance charge | (93,448) | (92,430) |
Charge on preference share conversion | - | (86,035) |
IFRS (loss)/profit before tax | (98,044) | 28,488 |
Tax | 9,855 | (32,407) |
IFRS loss after tax | (88,189) | (3,919) |
Our IFRS results incorporate the impact of the mark to market valuation of our property assets, hedging instruments and other non cash items. The table in note 9 to the financial statements reconciles the Underlying Earnings to IFRS results, the principal reconciling items being the revaluation loss on our investment properties and property assets under construction of $145.4million (2013: profit of $55.3 million), and the mark to market valuation of hedging instruments showing a loss of $9.8million (2013: profit of $6.4million).
These amounts are a factor of the conditions existing at the balance sheet date and anticipate the tougher operating environment in Russia in the coming year.
In 2013, we also had the one off accounting charge of $86 million following the conversion of half of the preference shares to ordinary shares on a 1 for 2 basis.
Investment Properties
Our completed investment property portfolio had a market value at 31 December 2014 of $1.61billion (2013: $1.65billion). This follows transfers from assets under construction of $106million and a valuation loss of $132.9million based on independent valuations at 31 December 2014 (see note 11). Investment property under construction had a market value of $46.7million at the year end, down from $116.0million at the beginning of the year following the completion of phases at Noginsk and Nova Riga and after a net revaluation loss of $10.0million. This includes a write down on the carrying value of regional land assets of $10.9million (see note 12).
Cash and Debt
Cash flow Summary | 2014 |
$'000 | |
Net cash generated from operating activities | 168,797 |
Net cash used in investing activities | (98,894) |
Net cash used in financing activities | (71,771) |
Net decrease in cash and cash equivalents | (1,868) |
Foreign exchange movements | (28,073) |
Decrease in cash | (29,941) |
Net cash generated from operating activities was $168.8million. Construction and improvement costs in the year were $105.6million, principally funded from a net increase in borrowings of $89.5million. Bank borrowing costs were $70.9million (2013: $72.0million) and distributions to ordinary and preference shareholders totalled $87.2million (2013: $75million). Cash held at the year end was $171.4million (2013: $201.3million). The majority of the foreign exchange impact on cash balances relates to the conversion of Rouble cash balances to US Dollars at the balance sheet date. As Rouble cash is held to cover Rouble expenditure the benefit of this is realised in future cashflows..
Debt | 2014 | 2013 |
$m | $m | |
Fixed rate debt | 220 | 86 |
Debt hedged with swaps | 222 | 305 |
Debt hedged with caps | 395 | 381 |
837 | 772 | |
Unhedged debt | 68 | 43 |
905 | 815 | |
Unamortised loan origination costs and accrued interest | (12) | (12) |
Total debt | 893 | 803 |
Undrawn facilities | 89 | 36 |
Weighted average cost of debt | 6.99% | 7.24% |
Weighted average term to maturity | 4.8 | 4.7 |
We have total debt outstanding of $905million at the year end (2013: $815million), with $68million (2013: $43million) unhedged at the year end. $42million of this has been hedged with caps since the year end. Our weighted average cost of debt reduced to 7.0% (2013: 7.2%) and weighted average time to maturity increased to 4.8 years (2013: 4.7 years) following a number of refinancings during the year.
Our nearest term maturity is in April 2016, all other facilities maturing between March 2017 and June 2024.
Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021-2024 |
Debt Maturing in US$ millions | - | 127 | 154 | 57 | 146 | 193 | 228 |
Percentage of total debt maturing (%) | - | 14 | 17 | 6 | 16 | 21 | 26 |
Number of maturing facilities | - | 1 | 2 | 1 | 3 | 3 | 5 |
The Group has refinanced $275million of debt facilities in the year, generating additional cash of $110million. This encompasses a new facility of $73million secured on our Novosibirsk asset, a $180million facility secured on our Noginsk project with $141million drawn before the year end and a $38million facility secured on the asset at Lobnya. The facility secured on the Konstanta asset has also been rolled over for two and a half years on existing terms.
A facility secured on the Nova Riga site was completed prior to the year end, with $15 million drawn before the year end. Since 31 December 2014, the Group has drawn a further $27million on the Nova Riga facility and $39million on the Noginsk facility.
Subsidiaries
Raven Mount now consists of the joint venture for second homes at The Lakes in the Cotswolds and legacy UK land bank. It contributed $1.4million to profit this year (2013: $2.5 million).
Roslogistics has contributed $8.3million to profit (2013: $14.7 million), the decrease simply a factor of the decrease in the USD equivalent of the subsidiaries Rouble denominated income in the latter part of the year. Because of the impact of the Rouble depreciation on the outlook for Roslogistics, the goodwill carried in the balance sheet of $3million has been impaired.
Provisions
The provisions carried have now unwound following the final court decision on the litigation on the Pushkino asset. Details are given in note 24 to the Financial Statements.
In summary, the good operating results for the year have allowed us to propose a final distribution equivalent to 3.5p and 6p for the year. Our adjusted, diluted NAV per share drops from 126cents to 106cents following revaluation losses, anticipating a tough year ahead.
Risk Report
The Board places significant importance on identifying and managing the risks facing the business. These encompass the risks, real and perceived, of operating in a foreign market such as Russia, and the more obvious cyclical, property specific risks, presented by the development and investment in a large property portfolio. Risk and uncertainties are accepted as part of doing business and managed accordingly. Over the reporting period, the risks which could impact our business have increased, however the Board, through its committee structure and management team have monitored, mitigated and minimised the impact of these risks where possible.
Within the Audit Committee report we have set out the process of how risks are identified, evaluated, analysed and mitigating actions implemented where possible. Within this section of the report we have highlighted the key risks, opportunities and uncertainties which currently face the Group.
Our balance sheet at the year end reflects the impact that the rapid drop in oil price had on the strength of the Rouble, exacerbated by the international sanctions deployed against Russia. This has significantly increased our credit risk for the coming year. Our property management team is discussing the position with all of our tenants and to date we have no significant overdue debts. This has heightened the focus on the management of our financial risks.
Financial Risks
Our strategy remains to build an investment portfolio in the Russian warehouse sector which allows us to generate a high US Dollar denominated, ungeared yield on cost. We believe that this will translate into attractive distribution yields for our shareholders. A key element of that strategy is the management of foreign exchange risk. Tenants accept the US Dollar/Rouble exposure with US Dollar pegged rents, in exchange for reduced inflationary indexation (linked to US CPI rather than Russian inflation). The macro economic and political risks that have arisen over the last year and the subsequent rapid depreciation of the Rouble, has increased the pressure on our Rouble based tenants to meet their lease obligations, especially smaller third party logistics providers. This translates into heightened credit risk for certain sectors of our tenant base. Our lease contracts are robust, with secure parent company or bank guarantees or cash deposits in place, however we have entered into dialogue with tenants to understand their needs and concerns, especially those with near term maturities. Given the weakness of the Rouble, in some instances, Rouble rents with annual Russian inflationary indexation may be attractive on new or maturing leases. The upside if the Rouble was to strengthen could be considerable and the higher indexation gives some downside protection. If we were to give any assistance to tenants through renegotiated lease terms, this would have to be achieved in the context of the existing banking covenants. Indeed, any significant changes to lease terms would require prior bank approval where the related asset was mortgaged as finance security.
Gearing
Gearing has enabled us to accelerate our growth but we have managed the risk to the Group by raising asset secured facilities, ring-fenced in special purpose vehicle structures. We have not taken any significant bank debt exposure onto the holding company balance sheet to date. By structuring our investments in this way, it allows us to monitor our debt service obligations at an asset level but maintain low gearing ratios at a consolidated level. Our Group gearing levels, not including preference shares, have been managed between 44% and 52%. Year end gearing has increased to 52% following the drop in investment property values at the year end.
Sanctions against Russian banks and the geopolitical situation have changed the banking environment. However during the year we have generated U$275million from new facilities, re-gearing $165million and providing additional cash resources of $110million for the Group. Since the year end, we have drawn a further $66million on facilities. We are a preferred counterparty with our banking partners. We have an excellent track record of managing our debt relationships and facilities and our secure cashflows provide our banking partners with lending returns not possible in western markets. We have continued to push out our debt maturity profile with a weighted average maturity of 4.8 years at 31 December 2014.
The erosion of property values and the heightened credit risk does mean that covenant breach risk is higher in the coming year. We do have comfortable debt service ratios and where banks have undertaken independent valuations since the year end, no loan to value breaches have occurred, although the headroom has reduced. The majority of the Group's financing facilities allow the borrowing entity to deposit cash to cover any potential marginal breaches in debt service or loan to value covenants and so we have mechanisms in place to mitigate this risk.
Key Performance Indicators
Given our distribution strategy, we place emphasis on our "Underlying Earnings" (as defined in note 9 to the financial statements) and operating cash flows after financing costs, the latter being the key metric in our incentive schemes. These measures give the most relevant and comparable information on the operating performance of our portfolio and our ability to pay distributions from those operations.
We also monitor our loan to value ratios and the impact of valuations on our diluted net asset value per share. As noted previously, these have increased in importance this year given the economic environment.
Property Acquisition and Development
The market in which we operate has historically been undersupplied. This meant that we have had to construct the majority of our portfolio speculatively, 2008 and 2009 being the periods of greatest construction activity. Since then we have undertaken a development programme which has delivered between 50,000sqm and 100,000sqm of speculative development each year. This organic development has enabled enhanced returns to shareholders with attractive unleveraged development returns.
In 2014, the introduction of new space has resulted in downward pressure on market rents. Vacancy rates in Moscow at the end of the year have increased from 3% to 7.9% because of the introduction of this new space. We do not expect much new development to be started in the current year and as the market remains structurally undersupplied, it is expected that vacancy rates will contract again as vacant space is taken up.
There are a number of potential acquisition opportunities in the market, of completed, fully let properties. We continue to assess acquisitions of fully let income producing assets to grow our portfolio but with the uncertainty in the market these projects have been put on hold. This has resulted in some aborted transaction costs in the year.
Acquisitions of completed assets have the potential to carry legacy risks as we have not been involved in the historic construction and management of the sites. Whilst this adds to the potential for enhanced asset management returns it also adds to our investment property risks. This is all part of the integration risk of introducing new assets to the portfolio and we complete detailed in house, and commission independent, due diligence on all potential acquisitions.
We have set out in the following table the principal risks and uncertainties that face our business, our view on how those risks have changed during the year and a description of how we mitigate or manage those risks.
Russian Political and Economic Risk
Risk | Impact | Mitigation | Change |
Ukraine
The situation in Ukraine is not resolved peaceably or escalates.
|
Increased isolation of Russia from international markets and increased sanctions exacerbate the slow down in the Russian economy.
|
It is difficult to mitigate against the worst case scenario if escalation were to close Russia's borders to Western markets. However, we have:
- Maximised cash reserves held at holding company level; - An organisational structure that would allow us to continue to operate the Russian business autonomously if necessary; and - A special purpose vehicle ("SPV") structure that protects the holding company assets (principally cash) in a worst case scenario.
In the more likely scenario that events continue to weigh on the Russian economy in the medium term, we have dealt with specific risks in the various sections below. | ↑ |
Oil Price
The global economy operates in a low oil price environment for the medium term. |
The impact on Russia's infrastructure investment programme and reforms increases the slow down in the economy. |
When the Company was incorporated in 2005, it was at a time of low oil prices. The attraction to the market was the chronic undersupply of product. The risk on this occasion of low oil prices has been the impact on the Rouble and its rapid depreciation. We have mitigated this by having US Dollar pegged rents but as explained in later sections this has increased the Group's credit risk. | NEW |
Financial Risk
Risk | Impact | Mitigation | Change |
Foreign Exchange
Adverse movements in Rouble or Sterling against US Dollar
|
The weakening of the Rouble against the US Dollar leading to pressure on market rents, a reduction in our US denominated earnings and the carrying value of assets in US Dollars.
If required to seek funding in alternative currencies to US Dollars an increase in foreign exchange risk would result.
Preference share coupon and ordinary share distributions are serviced in Sterling. As earnings are US Dollar denominated shareholder distributions are open to exchange risks. |
Rental income, whilst received in Roubles, is pegged to the US Dollar exchange rate, and so the exchange risk taken by tenants. In return, indexation is held to US CPI levels rather than Russian inflation. Sustained Rouble weakness will ultimately affect our tenants' ability to pay their rents as they are predominately Rouble businesses. This translates into heightened credit risk for our tenants.
We retain sufficient Rouble funds from rent collection to meet Rouble expenditure requirements;
Our largest Sterling exposure is the payment of preference share coupon and ordinary share distributions;
We have capped the exposure of our preference share coupon to December 2019, and retain sterling cash resources where possible to cover known ordinary share distribution commitments;
Construction costs are payable in Roubles, if we have insufficient Rouble resources to cover future construction payments we may enter into Non Deliverable Forward instruments to retain certainty on our US Dollar returns. However, given current market conditions and the weak Rouble, this risk has minimised in the current year; and
Our balance sheet is open to unrealised losses on foreign exchange when the US Dollar or Rouble weakens.
| ↑ |
Bank Lending
The number of banks lending in our market diminishes because of macro economic and/or political events.
|
Reduced access to funding and potential increase in funding cost.
Reduces our ability to refinance maturing facilities.
A reduction in gearing and an inability to borrow in US Dollars from Russian banks due to the effect of sanctions. |
Debt facility maturities have a weighted average of 4.8 years with one maturity in the next 2 years;
Facilities have a mix of amortising profiles and approximately $58 million of principal is repaid each year. This means that our gearing levels are relatively low (52% at 31 December 2014) and debt service coverage ratios are more than adequately met;
Alternative sources of funding such as Rouble loans or capital instruments are available but could increase the cost of debt and the foreign exchange risk.
| ↑ |
Interest rates
Cost of debt increases.
|
Group profitability and debt service cover reduce.
|
The majority of our variable cost of debt is hedged with the use of swaps and caps on US LIBOR;
We have reduced our weighted average cost of debt during the year to 7.0%; and
the weighted average remaining term of existing hedge instruments is 2.8 years.
| ↑ |
Treasury
Sanctions precipitate the introduction of currency controls. |
The flow of funds out of Russia is restricted. |
The majority of current cash resources are held at holding company level.
The majority of our banking facilities allow for debt to be serviced in alternative currencies.
| NEW |
Property Investment
Risk | Impact | Mitigation | Change | ||
|
· Reduced consumer demand will impact on demand for new lettings, renewal of existing leases and restrict rental growth.
As noted previously, Rouble depreciation increases the credit risk of our tenants. |
We have a diversified tenant base (our largest tenants, X5 Group and Itella each represent around 10% of current warehouse rental income);
Almost 50% of our income comes from tenants who individually, contribute less than 2% to rent roll;
The logistics market remains undersupplied and so is not dependent on continued growth as existing requirements have not yet been met;
The biggest risk for the coming year is credit risk caused by the significant depreciation in the Rouble against the US Dollar. | ↑ | ||
Composition of portfolio
Portfolio made up of predominantly one asset class with a concentration on the Moscow market. |
Potentially reduces liquidity of the portfolio; and
Could cause volatility in income and valuation movements.
|
Assets are located in different local markets, geographically, within Greater Moscow and Moscow remains the main hub for supply throughout Russia;
Moscow has a larger population than any other European City save Istanbul and can support niche players because of its size;
There remains a structural under supply of Grade A warehouses in Moscow and Russia as a whole, although vacancy rates have increased in the last year due to new supply coming onto the market. | ↑ | ||
|
· Lack of available acquisitions requires reliance on speculative development for growth.
Where acquisitions are possible, legacy issues may erode earnings enhancement. |
We have an internal management team with both international and Russian experience allowing issues to be identified prior to acquisition;
External advisers undertake full detailed due diligence;
The current market conditions allow opportunities to be taken where funding resources are available;
Organic growth through speculative development managed at levels below 10% of existing portfolio in any one year;
Given current market conditions, potential acquisitions and speculative development have been put on hold and so this risk will reduce in the current year. · |
↓ |
Property Development
Risk | Impact | Mitigation | Change |
Speculative Nature
Occupiers are reluctant to enter into commitments to take new space prior to asset construction commencement. |
Requires speculative development which will reduce income through vacant possession cost and valuation impact. |
We monitor market cycles and likely tenant demand before committing to new developments;
Our developments are built in phases to allow suspension of construction if markets move adversely; and
Current development plans have been put on hold given the market dynamics.
| ↓ |
Returns
Development projects fail to deliver the expected returns through cost and time overruns. |
Cost and time overruns, lower rental levels and delays in leasing on development projects can mean target yields are missed and profitability reduced. |
Full project appraisals prepared with appropriate monetary and timing contingencies;
Foreign exchange exposure hedged where necessary;
Recent devaluations of the Rouble have reduced costs in dollar terms on current construction projects; and
As no development programmes are expected to commence in 2015 this risk will reduce in the current year.
|
↓ |
Legacy Construction | Those schemes not built directly by Raven Russia which were acquired through a Joint Venture or simple completed asset purchase have not been subject to the control mechanisms in place in our construction department. There is therefore a risk that the build quality has defects which become apparent over time.
| Performing technical due diligence by both our in house team and external advisors when an asset is considered for acquisition;
Should any defect appear in one scheme then the other assets are then specifically checked to ensure the defect is not present there as well;
As any potential acquisition programme has been put on hold, this risk will reduce in the current year. | ↓ |
Russian Domestic Risk
Risk | Impact | Mitigation | Change |
Legal Framework
The legal framework in Russia is in the early stages of its development.
|
The large volume of new legislation from various state bodies is open to interpretation, puts strain on the judicial system and can be open to abuse.
|
Experienced in house legal team review new legislation for any impact on the business; and
External legal advisors used when necessary. |
-> |
Russian Taxation
Russian tax code is also developing and new rulings regularly introduced. |
Tax treaties may be renegotiated and new legislation may increase the Group's tax expense. |
The key tax treaty for the Group is with Cyprus and this was renegotiated during 2013 with no significant impact on the business;
Russia is a relatively low tax jurisdiction with 20% Corporation tax; and
The Group structures itself in anticipation of Russia's move towards a more Western taxation structure encompassing concepts such as thin capitalisation and transfer pricing. |
-> |
Other Operational Risks
Risk | Impact | Mitigation | Change |
Key Personnel
Failing to retain key personnel. |
Inability to implement strategy. |
The Remuneration Committee and Executives review remuneration packages against comparable market information;
Employees have regular appraisals and documented development plans and targets; and
Incentive schemes are based on measurable annual targets and weighted towards share based rewards. However, the macro economic and political events in Russia may make it difficult to achieve even the lowest of performance targets in the next three years.
| ↑ |
Business systems
Business and IT system disruption.
|
Disruption impacts on day to day operations.
|
Disaster recovery plans in place and all data stored remotely and duplicated on a second recovery site;
IT specialists now employed in house; and
Full upgrade of systems recently carried out. . | -> |
Cyprus
Failure of the Cyprus macro economy due to lack of funds or unsustainable levels of national debt. |
It may become too problematic or cost prohibitive to utilise Cyprus as an intermediate jurisdiction. |
The Eurogroup provided conditional financial assistance to Cyprus during 2013 and current indications are that Cyprus is complying with the conditions and its economy is ahead of forecasts; The Group is not exposed to or reliant on the Cyprus banking sector; and The Group has no material exposure to the euro and its Cyprus cost base is immaterial.
| ↓
|
Signed for and on behalf of the Board
Colin Smith
Director
8 March 2015
Going Concern
The financial position of the Group, its cash flows, liquidity position and borrowings are described in the Financial Review and the notes to the accompanying financial statements. In addition, in note 35 there is a description of the Group's objectives and policies for managing its capital, financial instruments and hedging activities and its exposure to credit and liquidity risk.
During the year the Group continued to hold substantial cash and short term deposits. The property portfolio is running at high occupancy levels with a weighted average time to lease maturity of 4.2 years, stable rental income streams and overhead base. Debt facilities have a weighted average time to maturity of 4.8 years at 31 December 2014.
The Board receive monthly updates on future cash flow projections and have regular working capital reports presented, in particular, as part of the half year and full year reporting process. The Group has historically maintained significant cash which, in the current climate will provide the Group with the resources to deal with market uncertainties and the potential impact of geopolitical issues. After making appropriate enquiries and examining sensitivities that could give rise to financial exposure, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue operations for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparation of these financial statements.
Directors' Responsibility Statement
The Statement of Directors' Responsibilities below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 December 2014.
The Board confirms to the best of its knowledge:
The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole;
The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
The Annual Report and Accounts, taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 8 March 2015 and is signed on its behalf by:
Mark Sinclair Colin Smith
Chief Financial Officer Chief Operating Officer
GROUP INCOME STATEMENT | |||||||
For the year ended 31 December 2014 | |||||||
2014 | 2013 | ||||||
Capital | Capital | ||||||
Underlying earnings | and other | Total | Underlying earnings | and other | Total | ||
Notes | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
Gross revenue | 4 / 5 | 257,596 | - | 257,596 | 272,269 | - | 272,269 |
Property operating expenditure and | |||||||
cost of sales | (65,279) | (9) | (65,288) | (85,765) | (65) | (85,830) | |
Net rental and related income | 192,317 | (9) | 192,308 | 186,504 | (65) | 186,439 | |
Administrative expenses | 4 / 6 | (26,967) | (7,663) | (34,630) | (25,925) | (2,019) | (27,944) |
Share-based payments and other long term incentives | 32 | - | (2,354) | (2,354) | - | (7,634) | (7,634) |
Foreign currency losses | (15,471) | - | (15,471) | (1,893) | - | (1,893) | |
Operating expenditure | (42,438) | (10,017) | (52,455) | (27,818) | (9,653) | (37,471) | |
Share of profits of joint ventures | 16 | 955 | - | 955 | 2,717 | - | 2,717 |
Operating profit / (loss) before profits | |||||||
and losses on investment property | 150,834 | (10,026) | 140,808 | 161,403 | (9,718) | 151,685 | |
Unrealised (loss) / profit on revaluation of | |||||||
investment property | 11 | - | (135,422) | (135,422) | - | 48,557 | 48,557 |
Unrealised (loss) / profit on revaluation of | |||||||
investment property under construction | 12 | - | (9,982) | (9,982) | - | 6,711 | 6,711 |
Operating profit / (loss) | 150,834 | (155,430) | (4,596) | 161,403 | 45,550 | 206,953 | |
Finance income | 7 | 3,208 | 2,453 | 5,661 | 2,495 | 7,231 | 9,726 |
Finance expense | 7 | (78,915) | (20,194) | (99,109) | (93,931) | (8,225) | (102,156) |
Charge on preference share conversion | 23 | - | - | - | - | (86,035) | (86,035) |
Profit / (loss) before tax | 75,127 | (173,171) | (98,044) | 69,967 | (41,479) | 28,488 | |
Tax | 8 | (8,475) | 18,330 | 9,855 | (9,716) | (22,691) | (32,407) |
Profit / (loss) for the year | 66,652 | (154,841) | (88,189) | 60,251 | (64,170) | (3,919) | |
Earnings per share: | 9 | ||||||
Basic (cents) | (12.33) | (0.71) | |||||
Diluted (cents) | (12.33) | (0.71) | |||||
Underlying earnings per share: | 9 | ||||||
Basic (cents) | 9.32 | 10.92 | |||||
Diluted (cents) | 8.94 | 10.33 | |||||
The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS as adopted by the EU. The "underlying earnings" and "capital and other" columns are both supplied as supplementary information permitted by IFRS as adopted by the EU. Further details of the allocation of items between the supplementary columns are given in note 9. | |||||||
All items in the above statement derive from continuing operations. | |||||||
All income is attributable to the equity holders of the parent company. There are no non-controlling interests. | |||||||
The accompanying notes are an integral part of this statement. | |||||||
GROUP STATEMENT OF COMPREHENSIVE INCOME | |||||
For the year ended 31 December 2014 | |||||
2014 | 2013 | ||||
US$'000 | US$'000 | ||||
Loss for the year | (88,189) | (3,919) | |||
Other comprehensive income, net of tax | |||||
Items to be reclassified to profit or loss in subsequent periods: | |||||
Foreign currency translation on consolidation | (41,010) | (14,873) | |||
Total comprehensive income for the year, net of tax | (129,199) | (18,792) | |||
All income is attributable to the equity holders of the parent company. There are no non-controlling interests. | |||||
The accompanying notes are an integral part of this statement. | |||||
GROUP BALANCE SHEET | ||||
As at 31 December 2014 | ||||
2014 | 2013 | |||
Notes | US$'000 | US$'000 | ||
Non-current assets | ||||
Investment property | 11 | 1,593,684 | 1,632,476 | |
Investment property under construction | 12 | 47,958 | 118,919 | |
Plant and equipment | 4,491 | 6,818 | ||
Goodwill | 14 | 2,375 | 7,906 | |
Investment in joint ventures | 16 | 17,355 | 18,464 | |
Other receivables | 17 | 37,042 | 66,436 | |
Derivative financial instruments | 19 | 6,853 | 10,266 | |
Deferred tax assets | 26 | 35,766 | 48,092 | |
1,745,524 | 1,909,377 | |||
Current assets | ||||
Inventory | 1,389 | 2,523 | ||
Trade and other receivables | 18 | 52,623 | 56,431 | |
Derivative financial instruments | 19 | 432 | 1,519 | |
Cash and short term deposits | 20 | 171,383 | 201,324 | |
225,827 | 261,797 | |||
Total assets | 1,971,351 | 2,171,174 | ||
Current liabilities | ||||
Trade and other payables | 21 | 84,962 | 101,630 | |
Derivative financial instruments | 19 | 1,253 | - | |
Interest bearing loans and borrowings | 22 | 55,252 | 81,803 | |
141,467 | 183,433 | |||
Non-current liabilities | ||||
Interest bearing loans and borrowings | 22 | 837,429 | 721,311 | |
Preference shares | 23 | 164,300 | 172,205 | |
Provisions | 24 | - | 42,700 | |
Other payables | 25 | 37,595 | 39,707 | |
Derivative financial instruments | 19 | 4,153 | 4,413 | |
Deferred tax liabilities | 26 | 89,118 | 115,486 | |
1,132,595 | 1,095,822 | |||
Total liabilities | 1,274,062 | 1,279,255 | ||
Net assets | 697,289 | 891,919 | ||
Equity | ||||
Share capital | 27 | 13,623 | 13,876 | |
Share premium | 267,992 | 287,605 | ||
Warrants | 28 | 1,195 | 1,279 | |
Own shares held | 29 | (63,649) | (22,754) | |
Capital reserve | 16,597 | 146,392 | ||
Translation reserve | (186,388) | (145,378) | ||
Retained earnings | 647,919 | 610,899 | ||
Total equity | 30 / 31 | 697,289 | 891,919 | |
Net asset value per share (dollars): | 31 | |||
Basic | 1.01 | 1.22 | ||
Diluted | 0.98 | 1.16 | ||
Adjusted net asset value per share (dollars): | 31 | |||
Basic | 1.10 | 1.32 | ||
Diluted | 1.06 | 1.26 | ||
The financial statements were approved by the Board of Directors on 8 March 2015 and signed on its behalf by: | ||||
Mark Sinclair | Colin Smith | |||
The accompanying notes are an integral part of this statement. | ||||
GROUP CASH FLOW STATEMENT | |||||
For the year ended 31 December 2014 | |||||
2014 | 2013 | ||||
Notes | US$'000 | US$'000 | |||
Cash flows from operating activities | |||||
(Loss) / profit before tax | (98,044) | 28,488 | |||
Adjustments for: | |||||
Depreciation | 6 | 2,142 | 2,019 | ||
Loss on disposal of plant and equipment | 9 | 65 | |||
Impairment of goodwill | 6 / 14 | 3,082 | - | ||
Share of profits of joint ventures | 16 | (955) | (2,717) | ||
Finance income | 7 | (5,661) | (9,726) | ||
Finance expense | 7 | 99,109 | 102,156 | ||
Charge on preference share conversion | 23 | - | 86,035 | ||
Loss / (profit) on revaluation of investment property | 11 | 135,422 | (48,557) | ||
Loss / (profit) on revaluation of investment property under construction | 12 | 9,982 | (6,711) | ||
Foreign exchange losses | 15,471 | 1,893 | |||
Share-based payments and other long term incentives | 32 | 2,354 | 7,634 | ||
162,911 | 160,579 | ||||
Receipts from joint ventures | 983 | 7,720 | |||
Decrease / (increase) in operating receivables | 1,267 | (4,000) | |||
Decrease in other operating current assets | 904 | 13,187 | |||
Increase in operating payables | 7,677 | 20,115 | |||
173,742 | 197,601 | ||||
Tax paid | (4,945) | (5,304) | |||
Net cash generated from operating activities | 168,797 | 192,297 | |||
Cash flows from investing activities | |||||
Payments for investment property under construction | (105,582) | (74,920) | |||
Refunds of VAT on construction | 4,790 | 4,258 | |||
Payments in respect of prior period acquisitions | (12,873) | (914) | |||
Release of retention on acquisition of subsidiary undertakings | 12,873 | 5,819 | |||
Proceeds from sale of plant and equipment | 42 | 311 | |||
Purchase of plant and equipment | (1,625) | (875) | |||
Loans repaid | 273 | 356 | |||
Interest received | 3,208 | 2,482 | |||
Net cash used in investing activities | (98,894) | (63,483) | |||
Cash flows from financing activities | |||||
Proceeds from long term borrowings | 298,000 | 194,400 | |||
Repayment of long term borrowings | (208,553) | (155,472) | |||
Bank borrowing costs paid | (70,979) | (72,042) | |||
Exercise of warrants | 27 / 28 | 524 | 549 | ||
Ordinary shares purchased under tender offers | 27 / 29 | (68,928) | (38,581) | ||
Costs incurred on issuing ordinary shares | - | (1,572) | |||
Dividends paid on preference shares | (18,225) | (36,424) | |||
Settlement of derivative financial instruments | (339) | 225 | |||
Premium paid for derivative financial instruments | (3,271) | (1,451) | |||
Net cash used in financing activities | (71,771) | (110,368) | |||
Net (decrease) / increase in cash and cash equivalents | (1,868) | 18,446 | |||
Opening cash and cash equivalents | 201,324 | 188,740 | |||
Effect of foreign exchange rate changes | (28,073) | (5,862) | |||
Closing cash and cash equivalents | 20 | 171,383 | 201,324 | ||
The accompanying notes are an integral part of this statement. | |||||
GROUP STATEMENT OF CHANGES IN EQUITY | ||||||||||||||||
For the year ended 31 December 2014 | ||||||||||||||||
Share | Share | Own Shares | Capital | Translation | Retained | |||||||||||
Capital | Premium | Warrants | Held | Reserve | Reserve | Earnings | Total | |||||||||
Notes | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||||
For the year ended 31 December 2013 | ||||||||||||||||
At 1 January 2013 | 11,131 | 71,475 | 1,367 | (24,145) | 102,808 | (123,697) | 650,023 | 688,962 | ||||||||
Loss for the year | - | - | - | - | - | - | (3,919) | (3,919) | ||||||||
Other comprehensive income | - | - | - | - | - | (14,873) | - | (14,873) | ||||||||
Total comprehensive income for the year | - | - | - | - | - | (14,873) | (3,919) | (18,792) | ||||||||
Warrants exercised | 27 / 28 | 22 | 615 | (88) | - | - | - | - | 549 | |||||||
Own shares acquired | 29 | - | - | - | (704) | - | - | - | (704) | |||||||
Own shares allocated | 29 | - | - | - | 1,857 | - | - | (1,857) | - | |||||||
Preference share conversion | 27 / 29 | 3,227 | 253,360 | - | (150) | - | - | - | 256,437 | |||||||
Ordinary shares cancelled under tender offers | 27 / 29 | (504) | (37,845) | - | 388 | - | - | - | (37,961) | |||||||
Share-based payments | 32 | - | - | - | - | - | - | 3,428 | 3,428 | |||||||
Transfer to retained earnings | - | - | - | - | - | (6,808) | 6,808 | - | ||||||||
Transfer in respect of capital profits | - | - | - | - | 43,584 | - | (43,584) | - | ||||||||
At 31 December 2013 | 13,876 | 287,605 | 1,279 | (22,754) | 146,392 | (145,378) | 610,899 | 891,919 | ||||||||
For the year ended 31 December 2014 | ||||||||||||||||
Loss for the year | - | - | - | - | - | - | (88,189) | (88,189) | ||||||||
Other comprehensive income | - | - | - | - | - | (41,010) | - | (41,010) | ||||||||
Total comprehensive income for the year | - | - | - | - | - | (41,010) | (88,189) | (129,199) | ||||||||
Warrants exercised | 27 / 28 | 21 | 587 | (84) | - | - | - | - | 524 | |||||||
Own shares acquired | 29 | - | - | - | (48,636) | - | - | - | (48,636) | |||||||
Own shares allocated | 29 | - | - | - | 7,141 | - | - | (7,011) | 130 | |||||||
Ordinary shares cancelled under tender offers | 27 / 29 | (274) | (20,200) | - | 600 | - | - | - | (19,874) | |||||||
Share-based payments | 32 | - | - | - | - | - | - | 2,425 | 2,425 | |||||||
Transfer in respect of capital losses | - | - | - | - | (129,795) | - | 129,795 | - | ||||||||
At 31 December 2014 | 13,623 | 267,992 | 1,195 | (63,649) | 16,597 | (186,388) | 647,919 | 697,289 | ||||||||
The accompanying notes are an integral part of this statement. |
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NOTES TO THE FINANCIAL STATEMENTS | ||||||||||
For the year ended 31 December 2014 | ||||||||||
1. General information
Raven Russia Limited (the "Company") and its subsidiaries (together the "Group") is a property investment group specialising in commercial real estate in Russia.
The Company is incorporated and domiciled in Guernsey under the provisions of the Companies (Guernsey) Law, 2008. The Company's registered office is at 1 Le Truchot, St Peter Port, Guernsey GY1 6EH.
The audited financial statements of the Group for the year ended 31 December 2014 were authorised by the Board for issue on 8 March 2015.
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2. Accounting policies
Basis of preparation
The Company has taken advantage of the exemption conferred by the Companies (Guernsey) Law, 2008, section 244, not to prepare company financial statements as group financial statements have been prepared for both current and prior periods. The group financial statements are presented in US Dollars and all values are rounded to the nearest thousand dollars ($'000) except where otherwise indicated.
The principal accounting policies adopted in the preparation of the group financial statements are set out below. The policies have been consistently applied to all years presented, unless otherwise indicated. | ||||||||||
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. | ||||||||||
Statement of compliance
The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards adopted for use in the European Union ("IFRS") and the Companies (Guernsey) Law, 2008.
Changes in accounting policies
The accounting policies adopted are consistent with those of the previous financial year. The Group has adopted new and amended IFRS and IFRIC interpretations as of 1 January 2014, which had no impact on the financial position or performance of the Group.
Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for later accounting periods and which have not been adopted early. These are:
IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) IFRS 9 Financial Instruments (effective 1 January 2018)
The Group is currently assessing the impact of these changes on its financial statements and the effect of this, if any, has yet to be determined.
The standards, amendments or revisions are effective for annual periods beginning on or after the dates noted above.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company, its subsidiaries and the special purpose vehicles ("SPVs") controlled by the Company, made up to 31 December each year. Control is achieved where the Company is exposed, or has rights, to variable returns from its involvement with or ownership of the investee entity and has the ability to affect those returns through its power over the investee.
The Group has acquired investment properties through the purchase of SPVs. In the opinion of the Directors, these transactions did not meet the definition of a business combination as set out in IFRS 3 "Business Combinations". Accordingly the transactions have not been accounted for as an acquisition of a business and instead the financial statements reflect the substance of the transactions, which is considered to be the purchase of investment property and investment property under construction.
The results of subsidiaries acquired or disposed of during the year are included in the Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of entities acquired to bring the accounting policies into line with those used by the Group.
All intra-group transactions, balances, income and expenditure are eliminated on consolidation.
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Goodwill
Goodwill represents the excess of the cost of a business combination over the interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired. Cost comprises the fair values of assets given, liabilities assumed and equity instruments issued. For business combinations after 1 January 2010, transaction costs associated with an acquisition are expensed as incurred.
Goodwill is capitalised with any impairment in carrying value being charged to the Income Statement. Impairment tests on goodwill are undertaken annually at the financial year end. Impairment charges are included in the administrative expenses line item in the Income Statement. An impairment loss recognised for goodwill is not reversed.
Where the interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired exceeds the cost of the combination, the resulting negative goodwill is recognised immediately in the Income Statement.
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Joint ventures
A joint venture is a contractual arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the activities require unanimous consent of the contracting parties for strategic financial and operating decisions.
The Group's investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying value of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Any premium paid for an interest in a joint venture above the fair value of the Group's share of identifiable assets, liabilities and contingent liabilities is determined as goodwill. Goodwill relating to a joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.
The aggregate of the Group's share of profit or loss of joint ventures is shown on the face of the Income Statement within Operating Profit and represents the profit or loss after tax.
Revenue recognition
(a) Property investment
Rental income from operating leases is recognised in income on a straight-line basis over the lease term. Rental increases calculated with reference to an underlying index and the resulting rental income ("contingent rents") are recognised in income as they are determined.
Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease, together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the directors are reasonably certain that the tenant will exercise that option.
Premiums received to terminate leases are recognised in the Income Statement as they arise.
(b) Roslogistics
Logistics revenue, excluding value added tax, is recognised as services are provided.
(c) Raven Mount
The sale of completed property and land is recognised on legal completion.
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Taxation
The Company is a limited company registered in Guernsey, Channel Islands, and is exempt from taxation. The Group is liable to Russian, UK and Cypriot tax arising on the results of its Russian, UK and Cypriot operations.
The tax expense represents the sum of the tax currently payable and deferred tax.
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(a) Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit (or loss) as reported in the Income Statement because it excludes items of income and expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
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(b) Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
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The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted at the reporting date. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
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(c) Value added tax
Revenue, expenditure, assets and liabilities are recognised net of the amount of value added tax except: Where the value added tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the value added tax is recognised as part of the cost of acquisition of the asset or as part of the expenditure item as applicable; and Receivables and payables that are stated with the amount of value added tax included.
The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables, as appropriate, in the Balance Sheet.
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Investment property and investment property under construction
Investment property comprises completed property and property under construction held to earn rentals or for capital appreciation or both. Investment property comprises both freehold and leasehold land and buildings.
Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at fair value. The Directors assess the fair value of investment property based on independent valuations carried out by their appointed property valuers or on independent valuations prepared for banking purposes. The Group has appointed Jones Lang LaSalle as property valuers to prepare valuations on a semi-annual basis. Valuations are undertaken in accordance with appropriate sections of the current Practice Statements contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards, 7th Edition (the "Red Book"). This is an internationally accepted basis of valuation. Gains or losses arising from changes in the fair value of investment property are included in the Income Statement in the period in which they arise. For the purposes of these financial statements, in order to avoid double counting, the assessed fair value is reduced by the present value of any tenant incentives and contracted rent uplifts that are spread over the lease term and increased by the carrying amount of any liability under a head lease that has been recognised in the balance sheet.
Borrowing costs that are directly attributable to the construction of investment property are included in the cost of the property from the date of commencement of construction until construction is completed.
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Leasing (as lessors)
Leases where the Group does not transfer substantially all the risks and benefits incidental to ownership of the asset are classified as operating leases. All of the Group's properties are leased under operating leases and are included in investment property in the Balance Sheet.
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Financial assets
The Group classifies its financial assets into one of the categories discussed below, depending upon the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity.
(a) Fair value through profit or loss
This category comprises only in-the-money derivatives (see financial liabilities policy for out-of-the-money derivatives), which are carried at fair value with changes in the fair value recognised in the Income Statement in finance income or finance expense.
(b) Loans and receivables
These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the case of the Group, loans and receivables comprise trade and other receivables, loans, security deposits, restricted cash and cash and short term deposits.
Loans and receivables are initially recognised at fair value, plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. The amount of the impairment loss is recognised in administrative expenses. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment is recognised, the previously recognised impairment loss is reversed. Any such reversal of an impairment loss is recognised in the Income Statement.
Cash and short term deposits include cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less.
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Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity comprises ordinary shares and warrants.
The Group classifies its financial liabilities into one of the categories listed below.
(a) Fair value through profit or loss
This category comprises only out-of-the-money derivatives, which are carried at fair value with changes in the fair value recognised in the Income Statement in finance income or finance expense.
(b) Other financial liabilities
Other financial liabilities include interest bearing loans, trade payables (including rent deposits and retentions under construction contracts), preference shares and other short-term monetary liabilities. Trade payables and other short-term monetary liabilities are initially recorded at fair value and subsequently carried at amortised cost using the effective interest rate method.
Interest bearing loans and preference shares are initially recorded at fair value net of direct issue costs and subsequently carried at amortised cost using the effective interest rate method. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest rate method.
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Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the Income Statement net of any reimbursement.
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Own shares held
Own equity instruments which are acquired are recognised at cost and deducted from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Group's own equity instruments. Any difference between the carrying amount and the consideration is recognised in retained earnings.
Share-based payments and other long term incentives
The Group rewards its key management and other senior employees by a variety of means many of which are settled by ordinary or preference shares of the Company, these include the Executive Share Option Schemes and the Combined Bonus and Long Term Incentive Scheme 2012 to 2014.
Awards linked to or settled by ordinary shares These are accounted for as equity-settled transactions in accordance with IFRS 2 Share-based Payment. The cost of equity-settled transactions is measured by reference to the fair value at the date at which they are granted. Fair value is determined by an external valuer, using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance conditions (vesting conditions), other than performance conditions linked to the price of the shares of the Company (market conditions). Any other conditions, which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market conditions, non-vesting conditions are taken into account in determining the fair value at grant date.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and service conditions are fulfilled. The cumulative expense that is recognised at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period represents the movement in cumulative expense recognised at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and service conditions are satisfied.
Where an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met.
Awards linked to or settled by preference shares These awards are accounted for in accordance with IAS 19 Employee Benefits whereby the Group estimates the cost of awards using the projected unit credit method, which involves estimating the future value of the preference shares at the vesting date and the probability of the awards vesting. The resulting expense is charged to the Income Statement over the performance period and the liability is re-measured at each Balance Sheet date.
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Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each Group entity are measured in the currency of the primary economic environment in which the entity operates (the "functional currency"). For the Company the directors consider this to be Sterling. The presentation currency of the Group is United States Dollars, which the directors consider to be the key currency for the Group's operations as a whole.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. Non-monetary assets and liabilities are translated using exchange rates at the date of the initial transaction or when their fair values are reassessed.
(c) On consolidation
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each Balance Sheet are translated at the closing rate at the date of the Balance Sheet; (ii) income and expenditure for each Income Statement are translated at the average exchange rate prevailing in the period unless this does not approximate the rates ruling at the dates of the transactions in which case they are translated at the transaction date rates; and (iii) all resulting exchange differences are recognised in Other Comprehensive Income.
On consolidation, the exchange differences arising from the translation of the net investment in foreign entities are recognised in Other Comprehensive Income. When a foreign entity is sold, such exchange differences are recognised in the Income Statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
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Dividends
Dividends to the Company's ordinary shareholders are recognised when they become legally payable. In the case of interim dividends, this is when declared by the directors. In the case of final dividends, this is when they are approved by the shareholders at an AGM.
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3. Critical accounting estimates and judgements
The Group makes certain estimates and judgements regarding the future. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.
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Judgements other than estimates
In the process of applying the Group's accounting policies the following are considered to have the most significant effect on the amounts recognised in the consolidated financial statements:
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(a) Acquisitions
Properties can be acquired through the corporate acquisition of a subsidiary company. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for the acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, consideration is made of the extent to which significant processes are acquired and the extent of ancillary services provided by the subsidiary.
When the acquisition of a subsidiary does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based on their relative fair values, and no goodwill or deferred tax is recognised.
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(b) Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future, against which the reversal of temporary differences can be deducted. Recognition, therefore, involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised.
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(c) Acquisitions of investment property
The consideration payable in respect of each acquisition is dependent upon certain future events. In calculating the cost of each acquisition the Group has assessed the most probable outcome as at the balance sheet date. These amounts are reconsidered annually at each year end. The assessments include consideration of the future rental levels and costs of construction of a property as well as the terms of the legal agreements governing each acquisition. Based on these factors management will consider whether a liability or a contingent liability should be recognised or disclosed at the balance sheet date.
Estimates
(a) Valuation of investment property and investment property under construction
The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable, fair value estimates. In making its estimation the Group considers information from a variety of sources and engages external, professional advisers to carry out third party valuations of its properties. The external valuations are completed in accordance with appropriate sections of the current Practice Statements contained in the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards, 8th Edition (the "Red Book"). This is an internationally accepted basis of valuation and is consistent with the requirements of IFRS 13. In our market, where transactional activity is minimal, the valuers are required to use a greater degree of estimation or judgement than in a market where comparable transactions are more readily available. For the valuations at 31 December 2014 the valuer has highlighted that as a result of market conditions at the valuation date it was necessary to make more judgements than is normally required.
The significant methods and assumptions used in estimating the fair value of investment property and investment property under construction are set out in note 13, along with detail of the sensitivities of the valuations to changes in the key inputs.
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(b) Income tax
As part of the process of preparing its financial statements, the Group is required to estimate the provision for income tax in each of the jurisdictions in which it operates. This process involves an estimation of the actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Balance Sheet.
Russian tax legislation is subject to varying interpretations and changes, which may occur frequently. The interpretation of legislation that the Group applies to its transactions and activities may be challenged by the relevant regional and federal authorities. Additionally there may be inconsistent interpretation of tax regulations by various authorities, creating uncertainties in the taxation environment in Russia. Fiscal periods remain open to review by the authorities for the three calendar years preceding the years of review and in some circumstances may cover a longer period. Additionally, there have been instances where tax regulations have taken effect retrospectively.
Significant judgement is required in determining the provision for income tax and the recognition of deferred tax assets and liabilities.
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4. Segmental information
The Group has three operating segments, which are managed and report independently to the Board of the Group. These comprise:
Property Investment - acquire, develop and lease commercial property in Russia Roslogistics - provision of warehousing, transport, customs brokerage and related services in Russia Raven Mount - sale of residential property in the UK
Financial information relating to Property Investment is provided to the Board on a property by property basis. The information provided is gross rentals, operating costs, net operating income, revaluation gains and losses and where relevant the profit or loss on disposal of an investment property. The individual properties have similar economic characteristics and are aggregated into a single reporting segment.
Information about Raven Mount provided to the Board comprises the gross sale proceeds, inventory cost of sales and gross profit, including the share of profits or losses of its joint venture.
Roslogistics is an independently managed business and the Board is presented with turnover, cost of sales and operating profits or losses after deduction of administrative expenses.
Administrative expenses and foreign currency gains or losses are reported to the Board by segment. Finance income and finance expense are not reported to the Board on a segment basis. Sales between segments are eliminated prior to provision of financial information to the Board.
For the Balance Sheet, segmental information is provided in relation to investment property, inventory, cash balances and borrowings. Whilst segment liabilities includes loans and borrowings, segment loss does not include the related finance costs. If such finance costs were included in segment profit or loss, the loss from Property Investment would have increased by US$67,658k (2013: US$63,114k).
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(a) Segmental information for the year ended and as at 31 December 2014 | ||||||||||
Year ended 31 December 2014 | Property | Raven | Segment | Central | ||||||
Investment | Roslogistics | Mount | Total | Overhead | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||||
Gross revenue | 230,108 | 24,399 | 3,089 | 257,596 | - | 257,596 | ||||
Operating costs / cost of sales | (55,567) | (8,606) | (1,115) | (65,288) | - | (65,288) | ||||
Net operating income | 174,541 | 15,793 | 1,974 | 192,308 | - | 192,308 | ||||
Administrative expenses | ||||||||||
Running general & administration expenses | (16,662) | (1,907) | (1,474) | (20,043) | (6,924) | (26,967) | ||||
Other acquisition / abortive project costs | (2,439) | - | - | (2,439) | - | (2,439) | ||||
Impairment of goodwill | - | (3,082) | - | (3,082) | - | (3,082) | ||||
Depreciation | (1,822) | (314) | (6) | (2,142) | - | (2,142) | ||||
Share-based payments and | ||||||||||
other long term incentives | (562) | - | - | (562) | (1,792) | (2,354) | ||||
Foreign currency losses | (13,266) | (2,205) | - | (15,471) | - | (15,471) | ||||
139,790 | 8,285 | 494 | 148,569 | (8,716) | 139,853 | |||||
Unrealised loss on revaluation of investment property | (135,422) | - | - | (135,422) | - | (135,422) | ||||
Unrealised loss on revaluation of | ||||||||||
investment property under construction | (9,982) | - | - | (9,982) | - | (9,982) | ||||
Share of profits of joint ventures | - | - | 955 | 955 | - | 955 | ||||
Segment profit / (loss) | (5,614) | 8,285 | 1,449 | 4,120 | (8,716) | (4,596) | ||||
Finance income | 5,661 | |||||||||
Finance expense | (99,109) | |||||||||
Loss before tax | (98,044) | |||||||||
As at 31 December 2014 | Property | Raven | ||||||||
Investment | Roslogistics | Mount | Total | |||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||
Assets | ||||||||||
Investment property | 1,593,684 | - | - | 1,593,684 | ||||||
Investment property under construction | 47,958 | - | - | 47,958 | ||||||
Investment in joint ventures | - | - | 17,355 | 17,355 | ||||||
Inventory | - | - | 1,389 | 1,389 | ||||||
Cash and short term deposits | 164,868 | 618 | 5,897 | 171,383 | ||||||
Segment assets | 1,806,510 | 618 | 24,641 | 1,831,769 | ||||||
Other non-current assets | 86,527 | |||||||||
Other current assets | 53,055 | |||||||||
Total assets | 1,971,351 | |||||||||
Segment liabilities | ||||||||||
Interest bearing loans and borrowings | 892,681 | - | - | 892,681 | ||||||
Capital expenditure | ||||||||||
Payments for investment property under construction | 105,582 | - | - | 105,582 | ||||||
(b) Segmental information for the year ended and as at 31 December 2013 | ||||||||||
Year ended 31 December 2013 | Property | Raven | Segment | Central | ||||||
Investment | Roslogistics | Mount | Total | Overhead | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||||
Gross revenue | 230,126 | 28,184 | 13,959 | 272,269 | - | 272,269 | ||||
Operating costs / cost of sales | (62,925) | (10,025) | (12,880) | (85,830) | - | (85,830) | ||||
Net operating income | 167,201 | 18,159 | 1,079 | 186,439 | - | 186,439 | ||||
Administrative expenses | ||||||||||
Running general & administration expenses | (15,969) | (2,382) | (1,296) | (19,647) | (6,122) | (25,769) | ||||
Other acquisition / abortive project costs | - | - | - | - | (156) | (156) | ||||
Depreciation | (1,673) | (337) | (9) | (2,019) | - | (2,019) | ||||
Share-based payments and other long term incentives | (1,949) | - | - | (1,949) | (5,685) | (7,634) | ||||
Foreign currency losses | (1,187) | (706) | - | (1,893) | - | (1,893) | ||||
146,423 | 14,734 | (226) | 160,931 | (11,963) | 148,968 | |||||
Unrealised profit on revaluation of investment property | 48,557 | - | - | 48,557 | - | 48,557 | ||||
Unrealised profit on revaluation of | ||||||||||
investment property under construction | 6,711 | - | - | 6,711 | - | 6,711 | ||||
Share of profits of joint ventures | - | - | 2,717 | 2,717 | - | 2,717 | ||||
Segment profit / (loss) | 201,691 | 14,734 | 2,491 | 218,916 | (11,963) | 206,953 | ||||
Finance income | 9,726 | |||||||||
Finance expense | (102,156) | |||||||||
Charge on preference share conversion | (86,035) | |||||||||
Profit before tax | 28,488 | |||||||||
As at 31 December 2013 | Property | Raven | ||||||||
Investment | Roslogistics | Mount | Total | |||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||
Assets | ||||||||||
Investment property | 1,632,476 | - | - | 1,632,476 | ||||||
Investment property under construction | 118,919 | - | - | 118,919 | ||||||
Investment in joint ventures | - | - | 18,464 | 18,464 | ||||||
Inventory | - | - | 2,523 | 2,523 | ||||||
Cash and short term deposits | 190,463 | 1,714 | 9,147 | 201,324 | ||||||
Segment assets | 1,941,858 | 1,714 | 30,134 | 1,973,706 | ||||||
Other non-current assets | 139,518 | |||||||||
Other current assets | 57,950 | |||||||||
Total assets | 2,171,174 | |||||||||
Segment liabilities | ||||||||||
Interest bearing loans and borrowings | 803,114 | - | - | 803,114 | ||||||
Capital expenditure | ||||||||||
Payments for investment property under construction | 75,834 | - | - | 75,834 | ||||||
5. Gross revenue | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Rental and related income | 230,108 | 230,126 | ||||||||
Proceeds from the sale of inventory property | 3,089 | 13,959 | ||||||||
Logistics | 24,399 | 28,184 | ||||||||
257,596 | 272,269 | |||||||||
The Group's leases typically include annual rental increases ("contingent rents") based on a consumer price index in Europe or the USA, which are recognised in income as they arise. Contingent rents included in rental income for the year amounted to US$2,507k (2013: US$2,234k).
Details of the Group's contracted future minimum lease receivables are detailed in note 38.
In 2014 and 2013 there were no single customers accounting for more than 10% of Group revenues.
| ||||||||||
6. Administrative expenses | ||||||||||
2014 | 2013 | |||||||||
(a) Total administrative expenses | US$'000 | US$'000 | ||||||||
Employment costs | 13,618 | 13,351 | ||||||||
Directors' remuneration | 3,698 | 3,371 | ||||||||
Office running costs and insurance | 4,032 | 4,052 | ||||||||
Travel costs | 1,878 | 2,070 | ||||||||
External administrator fees | 194 | 79 | ||||||||
Auditors' remuneration | 1,006 | 664 | ||||||||
Abortive project costs | 2,439 | 156 | ||||||||
Impairment of goodwill | 3,082 | - | ||||||||
Legal and professional | 2,252 | 1,993 | ||||||||
Depreciation | 2,142 | 2,019 | ||||||||
Registrar costs and other administrative expenses | 289 | 189 | ||||||||
34,630 | 27,944 | |||||||||
(b) Fees for audit and other services provided by the Group's auditor | ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
Audit services | 807 | 629 | ||||||||
Audit related assurance services | 74 | 71 | ||||||||
881 | 700 | |||||||||
Other fees: | ||||||||||
Taxation services | 97 | (74) | ||||||||
Other services | 28 | 38 | ||||||||
125 | (36) | |||||||||
Total fees | 1,006 | 664 | ||||||||
The Group engaged Ernst & Young to undertake due diligence for two investment property acquisitions that were under consideration. These transactions were subsequently aborted. Ernst & Young charged the Group fees amounting to US$324k for this work which are included in abortive project costs.
In addition in 2013 the Group incurred a further US$432k of corporate finance fees in respect of the ordinary shares created as part of the preference share conversion (see note 23), which are deducted from the share premium created. Ernst & Young also provide audit and taxation services for various SPVs that form part of the property operating costs. Charges for the audit of SPVs in the year amounted to US$338k (2013: US$318k) and the fees for taxation services were US$82k (2013: US$116k).
| ||||||||||
7. Finance income and expense | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Finance income | ||||||||||
Total interest income on financial assets not at fair value through profit or loss | ||||||||||
Income from cash and short term deposits | 3,208 | 2,495 | ||||||||
Other finance income | ||||||||||
Change in fair value of open forward currency derivative financial instruments | 342 | 400 | ||||||||
Change in fair value of open interest rate derivative financial instruments | 1,292 | 6,606 | ||||||||
Profit on maturing interest rate derivative financial instruments | 119 | - | ||||||||
Profit on maturing forward currency derivative financial instruments | 700 | 225 | ||||||||
Finance income | 5,661 | 9,726 | ||||||||
Finance expense | ||||||||||
Interest expense on loans and borrowings measured at amortised cost | 67,658 | 63,240 | ||||||||
Interest expense on preference shares | 20,012 | 38,288 | ||||||||
Total interest expense on financial liabilities not at fair value through profit or loss | 87,670 | 101,528 | ||||||||
Change in fair value of open forward currency derivative financial instruments | 4,609 | 398 | ||||||||
Change in fair value of open interest rate derivative financial instruments | 3,387 | 230 | ||||||||
Change in fair value of foreign currency embedded derivatives | 3,443 | - | ||||||||
Finance expense | 99,109 | 102,156 | ||||||||
Included in the interest expense on loans and borrowings is US$8.1 million (2013: US$6.2 million) relating to amortisation costs incurred in originating the loans. Included in the interest expense on preference shares is US$0.7 million (2013: US$1.4 million) relating to the accretion of premiums payable on redemption of preference shares and amortisation of costs incurred in issuing preference shares.
| ||||||||||
8. Tax | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
The tax expense for the year comprises: | ||||||||||
Current taxation | 9,149 | 5,610 | ||||||||
Deferred taxation | ||||||||||
On the origination and reversal of temporary differences (note 26) | (4,925) | 28,785 | ||||||||
On unrealised foreign exchange movements in loans | (14,256) | (2,380) | ||||||||
Adjustments recognised in the period for tax of prior periods | 177 | 392 | ||||||||
Tax (credit) / charge | (9,855) | 32,407 | ||||||||
The charge for the year can be reconciled to the (loss) / profit per the Income Statement as follows: | ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
(Loss) / profit before tax | (98,044) | 28,488 | ||||||||
Tax at the Russian corporate tax rate of 20% | (19,609) | 5,698 | ||||||||
Tax effect of income not subject to tax and non-deductible expenses | 38,760 | 40,536 | ||||||||
Tax on dividends and other inter company gains | 1,064 | 1,085 | ||||||||
Tax effect of financing arrangements | (123,428) | (33,024) | ||||||||
Movement on unprovided deferred tax and tax provisions | 93,181 | 17,720 | ||||||||
Adjustments recognised in the period for current tax of prior periods | 177 | 392 | ||||||||
(9,855) | 32,407 | |||||||||
9. Earnings measures
In addition to reporting IFRS earnings the Group adopts the European Public Real Estate Association ("EPRA") earnings measure, as set out in their Best Practice Policy Recommendations document issued in December 2014 and also reports its own underlying earnings measure.
EPRA earnings The EPRA earnings measure excludes investment property revaluations and gains or losses on disposal of investment property, intangible asset movements, gains and losses on derivative financial instruments and related taxation.
Underlying earnings Underlying earnings consists of the EPRA earnings measure, with additional group adjustments. The Directors consider underlying earnings to be a key performance measure, as this is the measure used by Management to assess the return on holding investment assets for the long term. Adjustments include share-based payments and other long term incentives, the accretion of premiums payable on redemption of preference shares, material non-recurring items, depreciation and amortisation of loan origination costs.
| ||||||||||
The calculation of basic and diluted earnings per share is based on the following data | 2014 | 2013 | ||||||||
: | US$'000 | US$'000 | ||||||||
Earnings | ||||||||||
Earnings for the purposes of basic and diluted earnings per share being the net loss for the year prepared under IFRS | (88,189) | (3,919) | ||||||||
Adjustments to arrive at EPRA earnings: | ||||||||||
Unrealised loss / (profit) on revaluation of investment property | 135,422 | (48,557) | ||||||||
Unrealised loss / (profit) on revaluation of investment property under construction | 9,982 | (6,711) | ||||||||
Profit on maturing foreign currency derivative financial instruments (note 7) | (700) | (225) | ||||||||
Profit on maturing interest rate derivative financial instruments (note 7) | (119) | - | ||||||||
Change in fair value of open forward currency derivative financial | ||||||||||
instruments (note 7) | 4,267 | (2) | ||||||||
Change in fair value of open interest rate derivative financial instruments (note 7) | 2,095 | (6,376) | ||||||||
Change in fair value of foreign currency embedded derivatives (note 7) | 3,443 | - | ||||||||
Movement on deferred tax thereon | (8,205) | 24,218 | ||||||||
Adjusted EPRA earnings | 57,996 | (41,572) | ||||||||
Charge on preference share conversion (note 23) | - | 86,035 | ||||||||
Loss on disposal of plant and equipment | 9 | 65 | ||||||||
Impairment of goodwill | 3,082 | - | ||||||||
Abortive project costs | 2,439 | - | ||||||||
Share-based payments and other long term incentives | 2,354 | 7,634 | ||||||||
Premium on redemption of preference shares and amortisation of issue costs (note 7) | 650 | 1,394 | ||||||||
Depreciation (note 6a) | 2,142 | 2,019 | ||||||||
Amortisation of loan origination costs (note 7) | 8,105 | 6,203 | ||||||||
Tax on unrealised foreign exchange movements in loans | (10,125) | (1,527) | ||||||||
Underlying earnings | 66,652 | 60,251 | ||||||||
2014 | 2013 | |||||||||
No '000 | No '000 | |||||||||
Number of shares | ||||||||||
Weighted average number of ordinary shares for the purposes of basic EPS (excluding own shares held) | 714,986 | 551,828 | ||||||||
Effect of dilutive potential ordinary shares: | ||||||||||
Warrants (note 28) | 17,011 | 18,256 | ||||||||
ERS (note 32) | 325 | 596 | ||||||||
LTIP (note 32) | 3,832 | 5,665 | ||||||||
CBLTIS (note 32) | 9,375 | 6,796 | ||||||||
Weighted average number of ordinary shares for the purposes of diluted EPS (excluding own shares held) | 745,529 | 583,141 | ||||||||
2014 | 2013 | |||||||||
Cents | Cents | |||||||||
EPS basic | (12.33) | (0.71) | ||||||||
Effect of dilutive potential ordinary shares: | ||||||||||
Warrants | - | - | ||||||||
ERS | - | - | ||||||||
LTIP | - | - | ||||||||
CBLTIS | - | - | ||||||||
Diluted EPS | (12.33) | (0.71) | ||||||||
EPRA EPS basic | 8.11 | (7.53) | ||||||||
Effect of dilutive potential ordinary shares: | ||||||||||
Warrants | (0.20) | - | ||||||||
ERS | - | - | ||||||||
LTIP | (0.04) | - | ||||||||
CBLTIS | (0.10) | - | ||||||||
EPRA EPS diluted | 7.78 | (7.53) | ||||||||
Underlying EPS basic | 9.32 | 10.92 | ||||||||
Effect of dilutive potential ordinary shares: | ||||||||||
Warrants | (0.22) | (0.36) | ||||||||
ERS | - | (0.01) | ||||||||
LTIP | (0.05) | (0.10) | ||||||||
CBLTIS | (0.11) | (0.12) | ||||||||
Underlying EPS diluted | 8.94 | 10.33 | ||||||||
10. Ordinary dividends | ||||||||||
The Company did not declare a final dividend for the year ended 31 December 2013 or an interim dividend for 2014 and instead implemented two tender offer buy backs of ordinary shares.
In the place of a final dividend for 2013 the Company implemented a tender offer buy back of ordinary shares on the basis of 1 in every 28 shares held at a tender price of 85 pence per share, the equivalent of a final dividend of 3 pence per share. Instead of an interim dividend for 2014 the Company implemented a tender offer buy back of ordinary shares on the basis of 1 in every 30 shares at a tender price of 75 pence per share, the equivalent of a dividend of 2.5 pence per share.
| ||||||||||
11. Investment property | ||||||||||
Asset class | Logistics | Logistics | Logistics | Office | ||||||
Location | Moscow | St Petersburg | Regions | St Petersburg | 2014 | |||||
Fair value hierarchy * | Level 3 | Level 3 | Level 3 | Level 3 | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Market value at 1 January 2014 | 1,198,986 | 189,090 | 217,113 | 40,922 | 1,646,111 | |||||
Transfer from investment property under construction (note 12) | 105,553 | - | - | - | 105,553 | |||||
Property improvements and movement in completion provisions | (7,667) | 312 | 348 | 877 | (6,130) | |||||
Unrealised loss on revaluation | (74,771) | (19,328) | (25,885) | (12,947) | (132,931) | |||||
Market value at 31 December 2014 | 1,222,101 | 170,074 | 191,576 | 28,852 | 1,612,603 | |||||
Tenant incentives and contracted rent uplift balances | (16,311) | (4,899) | (2,323) | (1,501) | (25,034) | |||||
Head lease obligations (note 25) | 6,115 | - | - | - | 6,115 | |||||
Carrying value at 31 December 2014 | 1,211,905 | 165,175 | 189,253 | 27,351 | 1,593,684 | |||||
Revaluation movement in the year ended 31 December 2014 | ||||||||||
Gross revaluation | (74,771) | (19,328) | (25,885) | (12,947) | (132,931) | |||||
Effect of tenant incentives and contracted rent uplift balances | (2,633) | (393) | 269 | 266 | (2,491) | |||||
Revaluation reported in the Income Statement | (77,404) | (19,721) | (25,616) | (12,681) | (135,422) | |||||
Asset class | Logistics | Logistics | Logistics | Office | ||||||
Location | Moscow | St Petersburg | Regions | St Petersburg | 2013 | |||||
Fair value hierarchy * | Level 3 | Level 3 | Level 3 | Level 3 | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Market value at 1 January 2013 | 1,083,879 | 173,409 | 200,032 | 45,000 | 1,502,320 | |||||
Transfer from investment property under construction (note 12) | 85,356 | 11 | - | - | 85,367 | |||||
Property improvements and movement in completion provisions | (8,716) | 8,468 | 1,864 | - | 1,616 | |||||
Unrealised profit / (loss) on revaluation | 38,467 | 7,202 | 15,217 | (4,078) | 56,808 | |||||
Market value at 31 December 2013 | 1,198,986 | 189,090 | 217,113 | 40,922 | 1,646,111 | |||||
Tenant incentives and contracted rent uplift balances | (13,678) | (4,506) | (2,592) | (1,767) | (22,543) | |||||
Head lease obligations (note 25) | 8,908 | - | - | - | 8,908 | |||||
Carrying value at 31 December 2013 | 1,194,216 | 184,584 | 214,521 | 39,155 | 1,632,476 | |||||
Revaluation movement in the year ended 31 December 2013 | ||||||||||
Gross revaluation | 38,467 | 7,202 | 15,217 | (4,078) | 56,808 | |||||
Effect of tenant incentives and contracted rent uplift balances | (5,324) | (1,816) | (600) | (511) | (8,251) | |||||
Revaluation reported in the Income Statement | 33,143 | 5,386 | 14,617 | (4,589) | 48,557 | |||||
*Classified in accordance with the fair value hierarchy, see note 36. There were no transfers between fair value hierarchy in 2013 or 2014. | ||||||||||
The movement in completion provisions for Moscow Logistics, includes the unwind of the completion provision in respect of the acquisition of Pushkino upon the conclusion of the litigation as described in note 24. At 31 December 2014 the Group has pledged investment property with a value of US$1,541 million (2013: US$1,565 million) to secure banking facilities granted to the Group (note 22). | ||||||||||
12. Investment property under construction | ||||||||||
Asset class | Assets under construction | Land Bank | ||||||||
Location | Moscow | Regions | Moscow | St Petersburg | Regions | 2014 | ||||
Fair value hierarchy * | Level 3 | Level 3 | Sub-total | Level 3 | Level 3 | Level 3 | Sub-total | Total | ||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||
Market value at 1 January 2014 | 79,535 | 13,800 | 93,335 | - | 3,668 | 18,963 | 22,631 | 115,966 | ||
Costs incurred | 66,669 | 58 | 66,727 | - | 175 | 284 | 459 | 67,186 | ||
Effect of foreign exchange rate changes | (7,032) | (4,908) | (11,940) | - | (1,286) | (7,675) | (8,961) | (20,901) | ||
Transfer between asset classes | - | - | - | - | - | - | - | - | ||
Transfer to investment property (note 11) | (105,553) | - | (105,553) | - | - | - | - | (105,553) | ||
Unrealised profit / (loss) on revaluation | 381 | 550 | 931 | - | (2,557) | (8,356) | (10,913) | (9,982) | ||
Market value at 31 December 2014 | 34,000 | 9,500 | 43,500 | - | - | 3,216 | 3,216 | 46,716 | ||
Head lease obligations (note 25) | 1,242 | - | 1,242 | - | - | - | - | 1,242 | ||
Carrying value at 31 December 2014 | 35,242 | 9,500 | 44,742 | - | - | 3,216 | 3,216 | 47,958 | ||
Asset class | Assets under construction | Land Bank | ||||||||
Location | Moscow | Regions | Moscow | St Petersburg | Regions | 2013 | ||||
Fair value hierarchy * | Level 3 | Level 3 | Sub-total | Level 3 | Level 3 | Level 3 | Sub-total | Total | ||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||
Market value at 1 January 2013 | 71,400 | 14,200 | 85,600 | 25,700 | 4,111 | 31,709 | 61,520 | 147,120 | ||
Costs incurred | 52,652 | 60 | 52,712 | - | 153 | 1,017 | 1,170 | 53,882 | ||
Effect of foreign exchange rate changes | (1,907) | (906) | (2,813) | (13) | (585) | (2,969) | (3,567) | (6,380) | ||
Transfer between asset classes | 25,687 | - | 25,687 | (25,687) | - | - | (25,687) | - | ||
Transfer to investment property (note 11) | (85,356) | - | (85,356) | - | (11) | - | (11) | (85,367) | ||
Unrealised profit / (loss) on revaluation | 17,059 | 446 | 17,505 | - | - | (10,794) | (10,794) | 6,711 | ||
Market value at 31 December 2013 | 79,535 | 13,800 | 93,335 | - | 3,668 | 18,963 | 22,631 | 115,966 | ||
Head lease obligations (note 25) | 2,953 | - | 2,953 | - | - | - | - | 2,953 | ||
Carrying value at 31 December 2013 | 82,488 | 13,800 | 96,288 | - | 3,668 | 18,963 | 22,631 | 118,919 | ||
*Classified in accordance with the fair value hierarchy, see note 36. There were no transfers between fair value hierarchy in 2013 or 2014. | ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
Revaluation movement in the year | ||||||||||
Unrealised profit on revaluation of assets carried at external valuations | 932 | 17,505 | ||||||||
Unrealised loss on revaluation of assets carried at directors' valuation | (10,914) | (10,794) | ||||||||
(9,982) | 6,711 | |||||||||
Borrowing costs capitalised in the year amounted to US$2.7 million (2013: US$1.2 million).
At 31 December 2014 the Group has pledged investment property under construction with a value of US$43.5 million (2013: US$54.7 million) to secure banking facilities granted to the Group (note 22).
| ||||||||||
13. Investment property and investment property under construction - Valuation | ||||||||||
It is the Group's policy to carry investment property and investment property under construction at fair value in accordance with IFRS 13 "Fair Value Measurement" and IAS 40 "Investment Property": - Investment property consists of the completed, income producing, portfolio; and - Investment property under construction consists of development projects and land bank.
The latter is sub-categorised as: - Assets under construction - current development projects and the value of land on additional phases of existing investment property; and - Land bank - land held for potential development.
| ||||||||||
For the purposes of IFRS 13 disclosure, we have analysed these categories by the geographical market they are located in being Moscow, St Petersburg and the Regions (the other Russian regional cities). These form distinct markets for valuation purposes as the fundamentals differ in each.
| ||||||||||
The fair value of the Group's investment property and assets under construction at 31 December 2014 has been arrived at on the basis of market valuations carried out by Jones Lang Lasalle ("JLL"), external valuers to the Group. JLL have consented to the use of their name in these financial statements.
The Group's land bank in St Petersburg and the Regions is valued by the Directors.
| ||||||||||
Valuation process
The executive management team members responsible for property matters determine the valuation policies and procedures for property valuations in consultation with the Chief Executive Officer and Chief Financial Officer.
| ||||||||||
The Group has three qualified RICS members on the management team, one of whom is the Chairman of RICS in Russia and the CIS. All have relevant valuation and market experience and are actively involved in the valuation process. They also regularly meet with agents and consultants in the market to obtain additional information and an alternative perspective.
| ||||||||||
The effectiveness and independence of the external valuer is reviewed each year. The criteria considered include market knowledge, reputation, independence and professional standards. The Audit Committee also meets the external valuer at least once a year. Executive management and the Directors have determined that the external valuer is experienced in the Russian market and acts as an "External Valuer" as defined in the "RICS Valuation - Professional Standards".
| ||||||||||
The external valuers perform their valuations in accordance with the "RICS Valuation - Professional Standards", the 2012 Edition (the "Red Book"). This is an internationally accepted basis of valuation and is consistent with the principles of IFRS 13.
| ||||||||||
For investment properties and assets under construction, the executive team members consult with the external valuers and the valuers then determine: - whether a property's fair value can be reliably determined; - which valuation method should be applied for each asset; and - the assumptions made for unobservable inputs that are used in valuation methods.
| ||||||||||
The land bank is valued by the Directors. The process followed includes regular site inspections, meetings with local real estate experts, comparison to any local land sale information and comparison to transactions in other regional cities including those where the Group has stable income producing assets. Updated acquisition appraisals and any indication of value for alternative use are also considered.
| ||||||||||
Valuations are prepared on a biannual basis. At each valuation date the executive team members review the information prepared by the property department for valuation purposes being submitted to the external valuers. Each property valuation is then reviewed and discussed with the external valuer in detail, adjustments made as necessary and results discussed with the Chief Executive Officer and Chief Financial Officer. | ||||||||||
The executive management also present the valuation results to the Audit Committee and hold discussions with the Group's auditors. Both the Audit Committee and the auditors also have discussions with the external valuers.
| ||||||||||
Valuation assumptions and key inputs
| ||||||||||
Class of property | Carrying amount | Valuation | Input | Range | ||||||
2014 | 2013 | technique | 2014 | 2013 | ||||||
US$'000 | US$'000 | |||||||||
Completed investment property | ||||||||||
Moscow - Logistics | 1,211,905 | 1,194,216 | Income | ERV per sqm | $110 to $135 | $120 to $145 | ||||
capitalisation | Initial yield | 11.3% to 12.8% | 10.0% to 11.5% | |||||||
Equivalent yield | 10.5% to 13.7% | 10.7% to 12.8% | ||||||||
Vacancy rate | 0.9% to 69.0% | 1.0% to 40.9% | ||||||||
Passing rent per sqm | $68 to $231 | $98 to $238 | ||||||||
St Petersburg - Logistics | 165,175 | 184,584 | Income | ERV per sqm | $110 | $115 | ||||
capitalisation | Initial yield | 13.0% to 13.8% | 10.5% to 11.1% | |||||||
Equivalent yield | 12.8% to 13.6% | 12.1% to 12.5% | ||||||||
Vacancy rate | 0% to 8.4% | 1.4% to 7.3% | ||||||||
Passing rent per sqm | $96 to $129 | $91 to $127 | ||||||||
Regional - Logistics | 189,253 | 214,521 | Income | ERV per sqm | $105 | $110 to $115 | ||||
capitalisation | Initial yield | 14.3% to 14.6% | 12.4% to 12.8% | |||||||
Equivalent yield | 13.0% to 13.3% | 12.0% to 12.5% | ||||||||
Vacancy rate | 0.9% to 5.2% | 0% to 3.8% | ||||||||
Passing rent per sqm | $99 to $214 | $97 to $214 | ||||||||
St Petersburg - Office | 27,351 | 39,155 | Income | ERV per sqm | $235 | $300 | ||||
capitalisation | Initial yield | 19.5% | 18.9% | |||||||
Equivalent yield | 13.0% | 12.3% | ||||||||
Vacancy rate | 0% | 0% | ||||||||
Passing rent per sqm | $323 | $535 | ||||||||
Range | ||||||||||
Other key information | Description | 2014 | 2013 | |||||||
Moscow - Logistics | Land plot ratio | 34% - 65% | 42% - 65% | |||||||
Age of building | 0 to 10 years | 1 to 9 years | ||||||||
Outstanding costs (US$'000) | 9,131 | 10,413 | ||||||||
St Petersburg - Logistics | Land plot ratio | 51% - 57% | 51% - 57% | |||||||
Age of building | 0 to 6 years | 4 to 5 years | ||||||||
Outstanding costs (US$'000) | 1,573 | 11,492 | ||||||||
Regional - Logistics | Land plot ratio | 48% - 61% | 48% - 61% | |||||||
Age of building | 5 years | 4 years | ||||||||
Outstanding costs (US$'000) | - | 1,070 | ||||||||
St Petersburg - Office | Land plot ratio | 320% | 320% | |||||||
Age of building | 8 years | 7 years | ||||||||
Outstanding costs (US$'000) | 400 | - | ||||||||
Investment property under construction | Carrying amount | Valuation | Input | Range | ||||||
2014 | 2013 | technique | 2014 | 2013 | ||||||
US$'000 | US$'000 | |||||||||
Moscow - Logistics | - | 38,635 | Residual | ERV per sqm | n/a | $130 | ||||
Initial yield | n/a | 11.0% | ||||||||
Cost to complete per sqm | n/a | $793 | ||||||||
Proposed land plot ratio | n/a | 46.5% | ||||||||
Moscow - Logistics | 35,242 | 43,853 | Comparable | Value per ha ($m) | $0.42-$0.89 | $1.05-$1.12 | ||||
Regional - Logistics | 9,500 | 13,800 | Comparable | Value per ha ($m) | $0.37 | $0.5 | ||||
The fair value of investment property is determined using the income capitalisation method where a property's fair value is estimated based on the normalised net operating income of the asset divided by the capitalisation (discount) rate. Each income stream from every tenant is valued based on capitalising the contracted rent for the term of the lease, including any fixed increases in rent but excluding any future indexation. Allowance at lease end is made for any potential letting void and an assessment is made of the estimated rental value on re-letting (ERV). These elements are determined based on current market conditions and values.
| ||||||||||
Assets under construction (development projects) are valued on a residual value basis using the future anticipated costs to complete construction, a provision for letting costs, a letting void period and an assessment of ERV. Depending on the status of the development, and how much of development process has been completed an allowance will also be made for developer's profit.
| ||||||||||
Assets under construction (additional phases of existing sites) are valued on a comparable basis. The value of these plots is estimated based on comparable transactions in the same market. This approach is based on the principle that a buyer will not pay more for an asset than it will cost to buy a comparable substitute property. The unit of comparison applied is the price per square metre.
| ||||||||||
All of the above valuations are completed by JLL.
The land bank is valued by the Directors using the comparable basis.
| ||||||||||
Sensitivity analysis of significant changes in unobservable inputs within Level 3 of the hierarchy
| ||||||||||
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are: - ERV; - Void period on re-letting; - Initial yield; and - Specific to property under development: construction costs, letting void, construction period and development profit.
In preparing their valuations at 31 December 2014, JLL have specifically referred to the uncertainty caused in the market by the rapid fall in the oil price and Rouble and the continuing impact of international sanctions on Russia. This has led to a significant increase in Russian bank base rates, a reduction in the availability of hard currency debt and a contraction in capital available for investment. The result is a further reduction of liquidity in the Russian real estate market, although given the immaturity of the market, it has always been relatively illiquid. JLL comment that the majority of buyers in the market are adopting a "wait and see" policy while volatility persists. This corresponds to the Group's experience at this time. In the absence of completed transactions, drawing conclusions on current market yields is challenging although yields have tended to build in a risk factor for the Russian market, hence they have always been significantly higher than most comparable international markets. The weakened Rouble has also had an effect on ERVs as rents become more expensive for Rouble denominated businesses in US Dollar terms.
Significant increases (or decreases) in the ERV (per sqm p.a.) would result in a significantly higher (or lower) fair value measurement. However, given the relatively low level of lease maturities in the short term, changes in ERV have not had a significant effect on the Group's portfolio valuation. Further significant increases (or decreases) in the long-term void period on re-letting and initial yield in isolation would result in a significantly lower (or higher) fair value measurement.
| ||||||||||
14. Goodwill | Roslogistics | Raven Mount | Total | |||||||
US$'000 | US$'000 | US$'000 | ||||||||
Balance at 1 January 2013 | 5,383 | 2,476 | 7,859 | |||||||
Effect of foreign exchange rate changes | - | 47 | 47 | |||||||
Balance at 31 December 2013 | 5,383 | 2,523 | 7,906 | |||||||
Effect of foreign exchange rate changes | (2,301) | (148) | (2,449) | |||||||
Impairment of goodwill | (3,082) | - | (3,082) | |||||||
Balance at 31 December 2014 | - | 2,375 | 2,375 | |||||||
Goodwill acquired through the Raven Mount and Roslogistics business combinations has been allocated for impairment purposes to their operating segments. These represent the lowest level within the Group at which goodwill is monitored for internal management purposes. The recoverable amount of goodwill has been determined based on value in use calculations using cash flow projections and project appraisals approved for internal management reporting and discounted at rates appropriate to each of the segments.
| ||||||||||
15. Investment in subsidiary undertakings | ||||||||||
The principal subsidiary undertakings of Raven Russia Limited, all of which have been included in these consolidated financial statements, are as follows: | ||||||||||
Country of | Proportion of ownership interest | |||||||||
Name | incorporation | 2014 | 2013 | |||||||
CJSC Kulon Development | Russia | 100% | 100% | |||||||
Fenix LLC | Russia | 100% | 100% | |||||||
Petroestate LLC | Russia | 100% | 100% | |||||||
EG Logistics LLC | Russia | 100% | 100% | |||||||
CJSC Kulon Istra | Russia | 100% | 100% | |||||||
Soyuz-Invest LLC | Russia | 100% | 100% | |||||||
CJSC Noginsk Vostok | Russia | 100% | 100% | |||||||
Resource Economia LLC | Russia | 100% | 100% | |||||||
Kulon Spb LLC | Russia | 100% | 100% | |||||||
Logopark Don LLC | Russia | 100% | 100% | |||||||
Logopark Ob LLC | Russia | 100% | 100% | |||||||
Delta LLC | Russia | 100% | 100% | |||||||
CJSC Toros | Russia | 100% | 100% | |||||||
Dorfin Limited | Cyprus | 100% | 100% | |||||||
League LLC | Russia | 100% | 100% | |||||||
Roslogistics Holdings (Russia) Limited | Cyprus | 100% | 100% | |||||||
Avalon Logistics Company LLC | Russia | 100% | 100% | |||||||
Raven Mount Group Limited | England | 100% | 100% | |||||||
Raven Russia Property Advisors Limited | England | 100% | 100% | |||||||
Raven Russia (Service Company) Limited | Guernsey | 100% | 100% | |||||||
The Group's investment property and investment property under construction are held by its subsidiary undertakings.
| ||||||||||
16. Investment in joint ventures | ||||||||||
The principal joint venture of the Group is as follows: | ||||||||||
Name | Country of incorporation | Proportion of ownership interest | ||||||||
2014 | 2013 | |||||||||
Coln Park LLP | England | 50% | 50% | |||||||
Coln Park LLP is the entity through which the Group undertakes its second home development activity in the UK. The Group's interest in each joint venture has been accounted for using the equity method. None of the Group's joint ventures are individually material. Summarised aggregated financial information of the joint ventures, prepared under IFRS, and a reconciliation with the carrying amount of the investments in the consolidated financial statements are set out below: | ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
Non-current assets | 5,333 | 18 | ||||||||
Inventory | 17,030 | 22,946 | ||||||||
Cash and short term deposits | 2,120 | 3,248 | ||||||||
Other current assets | 497 | 378 | ||||||||
Current liabilities | (1,133) | (1,200) | ||||||||
Net assets | 23,847 | 25,390 | ||||||||
Investment in joint ventures | ||||||||||
Goodwill on acquisition | 5,431 | 5,769 | ||||||||
Share of net assets at 50% | 11,924 | 12,695 | ||||||||
Carrying value | 17,355 | 18,464 | ||||||||
Carrying value at 1 January 2014 | 18,464 | |||||||||
Share of profit for the year | 955 | |||||||||
Share of distributions paid | (983) | |||||||||
Effect of foreign exchange rate changes | (1,081) | |||||||||
Carrying value at 31 December 2014 | 17,355 | |||||||||
2014 | 2013 | |||||||||
Summarised Income Statement | US$'000 | US$'000 | ||||||||
Gross revenue | 8,779 | 19,916 | ||||||||
Cost of sales | (6,026) | (14,042) | ||||||||
Administrative expenses | (787) | (322) | ||||||||
Profit before tax | 1,966 | 5,552 | ||||||||
Tax | (56) | (118) | ||||||||
Profit for the year | 1,910 | 5,434 | ||||||||
Group's share of profit for the year | 955 | 2,717 | ||||||||
The joint ventures had no contingent liabilities or capital commitments as at 31 December 2014 and 2013. The joint ventures cannot distribute their profits until they obtain the consent from the venture partners.
| ||||||||||
17. Other receivables | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Loans receivable | 1,029 | 1,261 | ||||||||
VAT recoverable | 4,907 | 6,471 | ||||||||
Security deposits | 4,596 | 4,781 | ||||||||
Prepayments and other receivables | 181 | 3,923 | ||||||||
Restricted cash (note 24) | 26,329 | 50,000 | ||||||||
37,042 | 66,436 | |||||||||
VAT recoverable arises from the payment of value added tax on construction of investment property, which will be recovered through the offset of VAT paid on future revenue receipts or repayment direct from the taxation authority. VAT recoverable has been split between current and non-current assets based on the Group's assessment of when recovery will occur.
| ||||||||||
18. Trade and other receivables | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Trade receivables | 36,459 | 37,620 | ||||||||
Prepayments | 3,505 | 7,231 | ||||||||
VAT recoverable | 10,637 | 10,422 | ||||||||
Other receivables | 778 | 638 | ||||||||
Tax recoverable | 1,244 | 520 | ||||||||
52,623 | 56,431 | |||||||||
19. Derivative financial instruments | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Interest rate derivative financial instruments | ||||||||||
Non-current assets | 5,819 | 5,923 | ||||||||
Non-current liabilities | (1,963) | (4,413) | ||||||||
Forward currency derivative financial instruments | ||||||||||
Non-current assets | 1,034 | 4,343 | ||||||||
Current assets | 432 | 1,519 | ||||||||
Foreign currency embedded derivatives | ||||||||||
Non-current liabilities | (2,190) | - | ||||||||
Current liabilities | (1,253) | - | ||||||||
The Group has entered into a series of interest rate derivative financial instruments to manage the interest rate and resulting cash flow exposure from the Group's banking facilities. At 31 December 2014 the instruments have a notional value of US$678 million (2013: US$686 million) and a weighted average fixed or capped rate of 1.5% (2013: 1.4%).
The Group had also entered into a series of forward currency derivative financial instruments to hedge interest payments due to preference shareholders against sterling strengthening. The instruments have a notional amount of US$70.4 million (2013: US$105.6 million), a weighted average capped rate of US$1.6 to £1 (2013: US$1.6 to £1) and quarterly maturities with the final instruments maturing on 21 December 2016 (2013: 21 December 2016). In January 2015 the Group entered into new forward currency derivative contracts extending the period covered to December 2019. The new contracts are for a notional amount of US$55.8 million and a strike price of US$1.6 to £1.
Several of the Group's leases incorporate collars and caps on US Dollar and Russian Rouble exchange rates. These have been categorised as embedded derivatives and their fair values calculated resulting in the liability disclosed above.
| ||||||||||
20. Cash and short term deposits | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Cash at bank and on call | 146,054 | 119,600 | ||||||||
Short term deposits | 25,329 | 81,724 | ||||||||
171,383 | 201,324 | |||||||||
Cash at bank and on call attracts variable interest rates, whilst short term deposits attract fixed rates but mature and re-price over a short period of time. The weighted average interest rate at the balance sheet date is 1.39% (2013: 1.43%).
| ||||||||||
21. Trade and other payables | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Trade and other payables | 7,374 | 8,678 | ||||||||
Construction payables | 19,477 | 25,552 | ||||||||
Advanced rentals | 35,182 | 46,547 | ||||||||
Other payables | 9,005 | 4,922 | ||||||||
Tax payable | 13,890 | 15,879 | ||||||||
Head leases (note 25) | 34 | 52 | ||||||||
84,962 | 101,630 | |||||||||
22. Interest bearing loans and borrowings | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Bank loans | ||||||||||
Loans due for settlement within 12 months | 55,252 | 81,803 | ||||||||
Loans due for settlement after 12 months | 837,429 | 721,311 | ||||||||
892,681 | 803,114 | |||||||||
The Group's borrowings have the following maturity profile: | ||||||||||
On demand or within one year | 55,252 | 81,803 | ||||||||
In the second year | 174,646 | 47,553 | ||||||||
In the third to fifth years | 406,066 | 487,197 | ||||||||
After five years | 256,717 | 186,561 | ||||||||
892,681 | 803,114 | |||||||||
The amounts above include unamortised loan origination costs of US$13.3 million (2013: US$13.4 million) and interest accruals of US$1.4 million (2013: US$1.4 million).
| ||||||||||
The principal terms of the Group's interest bearing loans and borrowings on a weighted average basis are summarised below:
| ||||||||||
Interest | Maturity | |||||||||
As at 31 December 2014 | Rate | (years) | US$'000 | |||||||
Secured on investment property and investment property under construction | 6.9% | 4.8 | 863,931 | |||||||
Unsecured facility of the Company | 7.9% | 5.7 | 28,750 | |||||||
892,681 | ||||||||||
As at 31 December 2013 | ||||||||||
Secured on investment property and investment property under construction | 7.2% | 4.6 | 773,114 | |||||||
Unsecured facility of the Company | 7.9% | 6.7 | 30,000 | |||||||
803,114 | ||||||||||
The interest rates shown above are the weighted average cost, including US LIBOR, as at the Balance Sheet dates.
During the year there were the following changes to the Group's financing arrangements:
The Group agreed an increase of US$23 million to the facility provided by Unicredit secured on the Noginsk project in 2013 and this was fully drawn in January 2014. The Group subsequently refinanced the Unicredit facility, drawing down US$141 million from a US$180 million facility advanced by VTB and secured on the asset. The facility is for a six year term and a fixed interest rate to the Group of 7% per annum. The remainder of the facility was drawn on 27 February 2015.
The Group also refinanced the IFC / EBRD facility secured on the Novosibirsk project, drawing down US$73 million from a facility provided by Sberbank. The facility was fully drawn, has a ten year term and a margin of 5.6% over US LIBOR.
The Group also refinanced the Bank of Cyprus facility secured on Lobnya, drawing down US$38 million from a facility provided by Unicredit. The facility was fully drawn, has a five year term and a margin of 6.25% over US LIBOR.
The Group also agreed a US$65 million construction facility from Unicredit secured on the first phase of the Nova Riga project. US$15 million was drawn in 2014 and a further US$27 million since the year end. The facility is for 5 year term and has a margin of 7.5% over US LIBOR. The undrawn portion of the facility is available until 24 September 2015 and is dependent on building the next phase of the project.
A further US$8 million was drawn from a US$33 million facility from ZAO Raiffeisen Bank secured on the third phase of the Klimovsk project. The remaining US$5 million of this facility was not drawn and its availability lapsed during the year.
Finally, the Group extended the HSH Nordbank facility secured on the Konstanta project for a further two and a half years at a margin of 6% over US LIBOR.
At 31 December the Group had undrawn loan facilities available of US$89 million (2013: US$36 million), of which US$66 million has been drawn since the year end and the remainder is dependent on building the next phase of Nova Riga.
The Group has entered into hedging arrangements in respect of its exposure to floating interest rates (note 19). US$222 million (2013: US$305 million) of Group bank borrowings have been fixed with two years remaining (2013: three years) at a weighted average swap rate of 1.44% (2013: 1.43%) and US$457 million (2013: US$381 million) capped at 1.52% (2013: 1.33%) for three years (2013: four years). This gave a weighted average cost of debt to the Group of 7.0% (2013: 7.2%) at the year end.
| ||||||||||
23. Preference shares | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Authorised share capital | ||||||||||
400,000,000 (2013: 400,000,000) preference shares of 1p each | 5,981 | 5,981 | ||||||||
Issued share capital: | ||||||||||
At 1 January | 172,205 | 325,875 | ||||||||
Reissued / issued in the year | 593 | 8,473 | ||||||||
Premium on redemption of preference shares and amortisation of issue costs | 650 | 1,476 | ||||||||
Converted to ordinary shares | - | (171,973) | ||||||||
Scrip dividends | 935 | 2,238 | ||||||||
Movement on accrual for preference dividends | - | (59) | ||||||||
Effect of foreign exchange rate changes | (10,083) | 6,175 | ||||||||
At 31 December | 164,300 | 172,205 | ||||||||
2014 | 2013 | |||||||||
Number | Number | |||||||||
Issued share capital: | ||||||||||
At 1 January | 97,379,362 | 190,409,488 | ||||||||
Reissued / issued in the year | 258,197 | 3,410,388 | ||||||||
Converted to ordinary shares | - | (97,359,522) | ||||||||
Scrip dividends | 374,868 | 919,008 | ||||||||
At 31 December | 98,012,427 | 97,379,362 | ||||||||
Shares in issue | 98,049,476 | 97,674,608 | ||||||||
Held by the Company's Employee Benefit Trusts | (37,049) | (295,246) | ||||||||
At 31 December | 98,012,427 | 97,379,362 | ||||||||
The preference shares entitle the holders to a cumulative annual dividend of 12 pence per share.
Preference shares reissued are where the Company's Employee Benefit Trusts transfer preference shares previously acquired or subscribed to employees in accordance with the terms of the CBLTIS (see note 32b).
On 31 December 2013 the Company converted 97,416,231 preference shares into 194,832,462 ordinary shares in accordance with the terms of the preference share conversion offer made to preference shareholders on 27 November 2013. The difference between the carrying value of the preference shares converted and the fair value of the ordinary shares created resulted in a charge of US$86 million to the Income Statement. The Company's Employee Benefit Trust participated in the conversion and converted 56,709 preference shares.
| ||||||||||
24. Provisions | ||||||||||
Provisions at 31 December 2013 reflected the litigation in CJSC Toros ("Toros"), the subsidiary company that owns the Pushkino project.
In December 2010, prior to the Group's acquisition of Pushkino, a supplier to Toros filed a claim against Toros in the Moscow Region Arbitration Court, concerning alleged non payment of rent in respect of the supply of electricity generating equipment. The amount claimed was 827.4 million Roubles plus interest at the prevailing Russian Central Bank financing rate. After various court hearings and appeals the claim at 31 December 2013 rose to 1,141.7 million Roubles (US$34.9 million) plus interest. Further appeal hearings were heard in 2014 and on 18 August 2014, the Moscow Circuit Commercial Court resolved finally that the amount payable by Toros was in fact 467.4 million Roubles. This amount was paid by the Company on 29 August 2014 in settlement of the claim and reduced the provision by US$12.9 million. The movement in US Dollar Rouble exchange rate gave rise to a foreign exchange profit on translation into US Dollars of US$13.3 million and the remainder of the provision, less an amount of US$5.3 million which is reflected in accruals, was released to investment property as an adjustment to the completion provision on acquisition.
| ||||||||||
At the time of the acquisition the vendor of Toros, PLP Holding GmbH ("PLP"), agreed to indemnify Padastro Holdings Limited ("Padastro"), the acquiring entity and the new holding company of Toros, in respect of this litigation. The indemnity was secured by a cash retention and PLP retained conduct of the claim on behalf of Toros in return. In 2013, PLP agreed with Padastro and Toros to release the retention in return for which Padastro released its claim under the indemnity. Toros took over conduct of the litigation and under the terms of the agreement to release the indemnity, the majority of the retention monies received were restricted until the litigation was resolved. Under the terms of the indemnity, Padastro expects to apply for the release of the remaining restricted cash in the first quarter of 2015.
| ||||||||||
25. Other payables | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Rent deposits | 30,249 | 24,737 | ||||||||
Head leases | 7,323 | 11,809 | ||||||||
Other payables | 23 | 3,161 | ||||||||
37,595 | 39,707 | |||||||||
The Group has leasehold properties that it classifies as investment property and investment property under construction. Minimum lease payments due over the remaining term of the leases totalled US$22.3 million and have a present value at 31 December 2014, as reflected above and in note 21, of US$7.357 million (2013: US$11.861 million).
| ||||||||||
26. Deferred tax | ||||||||||
Tax losses | Other | Total | ||||||||
(a) Deferred tax assets | US$'000 | US$'000 | US$'000 | |||||||
Balance at 1 January 2013 | 52,709 | - | 52,709 | |||||||
Effect of foreign exchange rate changes | (3,769) | - | (3,769) | |||||||
Charge for the year | (538) | (310) | (848) | |||||||
Balance at 31 December 2013 | 48,402 | (310) | 48,092 | |||||||
Effect of foreign exchange rate changes | (23,723) | - | (23,723) | |||||||
Credit for the year | 11,104 | 293 | 11,397 | |||||||
Balance at 31 December 2014 | 35,783 | (17) | 35,766 | |||||||
The Group has tax losses in Russia of US$481 million (2013: US$291 million) and tax losses in the UK of US$119 million (2013: US$130 million) for which deferred tax assets have not been recognised. The losses in Russia expire in 10 years (2013: 10 years) whilst the UK losses do not have an expiry date.
| ||||||||||
Revaluation | ||||||||||
Accelerated tax | of investment | |||||||||
allowances | property | Total | ||||||||
(b) Deferred tax liabilities | US$'000 | US$'000 | US$'000 | |||||||
Balance at 1 January 2013 | 34,298 | 57,716 | 92,014 | |||||||
Effect of foreign exchange rate changes | (2,476) | - | (2,476) | |||||||
Charge for the year | 12,805 | 13,143 | 25,948 | |||||||
Balance at 31 December 2013 | 44,627 | 70,859 | 115,486 | |||||||
Effect of foreign exchange rate changes | (18,761) | - | (18,761) | |||||||
Charge / (credit) for the year | 8,002 | (15,609) | (7,607) | |||||||
Balance at 31 December 2014 | 33,868 | 55,250 | 89,118 | |||||||
27. Share capital | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Authorised ordinary share capital | ||||||||||
1,500,000,000 (2013: 1,500,000,000) ordinary shares of 1p each | 27,469 | 27,469 | ||||||||
Issued share capital: | ||||||||||
At 1 January | 13,876 | 11,131 | ||||||||
On conversion of preference shares (note 23) | - | 3,227 | ||||||||
Issued in the year for cash on warrant exercises (note 28) | 21 | 22 | ||||||||
Cancelled under tender offers (note 10) | (274) | (504) | ||||||||
At 31 December | 13,623 | 13,876 | ||||||||
2014 | 2013 | |||||||||
Number | Number | |||||||||
Issued share capital: | ||||||||||
At 1 January | 753,379,368 | 589,349,049 | ||||||||
On conversion of preference shares (note 23) | - | 194,832,462 | ||||||||
Issued in the year for cash on warrant exercises (note 28) | 1,281,506 | 1,392,235 | ||||||||
Cancelled under tender offers (note 10) | (17,062,521) | (32,194,378) | ||||||||
At 31 December | 737,598,353 | 753,379,368 | ||||||||
Of the authorised ordinary share capital at 31 December 2014, 25,466,412 (2013: 26,747,918) are reserved for warrants.
In 2013 the Company incurred fees and expenses of US$1.6 million in arranging the conversion of preference shares into ordinary shares. These fees and expenses were deducted from the share premium created on conversion.
Details of own shares held are given in note 29.
| ||||||||||
28. Warrants | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
At 1 January | 1,279 | 1,367 | ||||||||
Exercised in the year (note 27) | (84) | (88) | ||||||||
At 31 December | 1,195 | 1,279 | ||||||||
2014 | 2013 | |||||||||
Number | Number | |||||||||
At 1 January | 26,747,918 | 28,140,153 | ||||||||
Exercised in the year (note 27) | (1,281,506) | (1,392,235) | ||||||||
At 31 December | 25,466,412 | 26,747,918 | ||||||||
The Company has issued warrants, which entitle each holder to subscribe for ordinary shares in the Company at an exercise price of 25 pence per share. The warrants expire on 25 March 2019.
31,207 warrants have been exercised in the period since 31 December 2014.
| ||||||||||
29. Own shares held | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
At 1 January | (22,754) | (24,145) | ||||||||
Acquired under tender offers | (48,095) | - | ||||||||
On conversion of preference shares (note 23) | - | (150) | ||||||||
Other acquisitions | (541) | (704) | ||||||||
Cancelled | 600 | 388 | ||||||||
Allocation to satisfy bonus awards (note 32c) | - | 52 | ||||||||
Allocation to satisfy ERS options exercised (note 32a) | - | 422 | ||||||||
Allocation to satisfy LTIP options exercised (note 32a) | 1,189 | 1,383 | ||||||||
Allocation to satisfy CBLTIS awards vested (note 32b) | 5,952 | - | ||||||||
At 31 December | (63,649) | (22,754) | ||||||||
2014 | 2013 | |||||||||
Number | Number | |||||||||
At 1 January | 22,199,776 | 25,557,737 | ||||||||
Acquired under tender offers | 35,000,000 | - | ||||||||
On conversion of preference shares (note 23) | - | 113,418 | ||||||||
Other acquisitions | 449,014 | 528,515 | ||||||||
Cancelled | (768,220) | (900,941) | ||||||||
Allocation to satisfy bonus awards (note 32c) | - | (121,429) | ||||||||
Allocation to satisfy ERS options exercised (note 32a) | - | (979,592) | ||||||||
Allocation to satisfy LTIP options exercised (note 32a) | (1,272,447) | (1,997,932) | ||||||||
Allocation to satisfy CBLTIS awards vested (note 32b) | (6,559,250) | - | ||||||||
At 31 December | 49,048,873 | 22,199,776 | ||||||||
Allocations are transfers by the Company's Employee Benefit Trusts to settle bonus awards made in the year, CBLTIS awards that vest and to satisfy ERS and LTIP options exercised in the year following the vesting of the options. The amounts shown for share movements are net of the Trustees' participation in tender offers during the period from grant to exercise. Details of outstanding ERS and LTIP options, which are vested but unexercised, are given in note 32a.
| ||||||||||
30. Equity | ||||||||||
The following describes the nature and purpose of each component within equity: | ||||||||||
Component | Description and purpose | |||||||||
Share capital | The amount subscribed for ordinary share capital at nominal value. | |||||||||
Share premium | The amount subscribed for ordinary share capital in excess of the nominal value. | |||||||||
Warrants | The consideration attributed to the subscription of warrants less associated costs of issuance. | |||||||||
Own shares held | The cost to the Company of acquiring the own shares held by the Company and its subsidiary undertakings or Employee Benefit Trusts. | |||||||||
Capital reserve | The amount of any capital profits and losses, including gains and losses on the disposal of investment properties (after taxation), increases and decreases in the fair value of investment properties held at each period end, foreign exchange profits and losses on capital items, profits and losses on forward currency financial instruments relating to capital items and deferred taxation on the increase in fair value of investment properties | |||||||||
Translation reserve | The amount of any gains or losses arising on the retranslation of net assets of overseas operations. | |||||||||
Retained earnings | The amount of any profit or loss for the year after payment of dividend, together with the amount of any equity-settled share-based payments, and the transfer of capital items described above. Retained earnings also includes distributable reserves created when in 2005 and 2006 the Company applied to the Royal Court of Guernsey to cancel its share premium at that time and create a reserve which is distributable | |||||||||
31. Net asset value per share | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Net asset value | 697,289 | 891,919 | ||||||||
Goodwill | (2,375) | (7,906) | ||||||||
Goodwill in joint ventures | (5,431) | (5,769) | ||||||||
Deferred tax on revaluation gains (note 26b) | 55,250 | 70,859 | ||||||||
Unrealised foreign exchange losses on preference shares | 13,955 | 24,038 | ||||||||
Fair value of interest rate derivative financial instruments (note 19) | (3,856) | (1,510) | ||||||||
Fair value of embedded derivatives (note 19) | 3,443 | - | ||||||||
Fair value of foreign exchange derivative financial instruments (note 19) | (1,466) | (5,862) | ||||||||
Adjusted net asset value | 756,809 | 965,769 | ||||||||
Assuming exercise / vesting of all dilutive potential ordinary shares | ||||||||||
- Warrants (note 28) | 9,927 | 11,076 | ||||||||
- ERS (note 32) | - | - | ||||||||
- LTIP (note 32) | 2,099 | 2,780 | ||||||||
- CBLTIS (note 32) | - | - | ||||||||
Adjusted fully diluted net asset value | 768,835 | 979,625 | ||||||||
Number of ordinary shares (note 27) | 737,598,353 | 753,379,368 | ||||||||
Less own shares held (note 29) | (49,048,873) | (22,199,776) | ||||||||
688,549,480 | 731,179,592 | |||||||||
Assuming exercise / vesting of all dilutive potential ordinary shares | ||||||||||
- Warrants (note 28) | 25,466,412 | 26,747,918 | ||||||||
- ERS (note 32) | 325,000 | 325,000 | ||||||||
- LTIP (note 32) | 5,383,784 | 6,712,613 | ||||||||
- CBLTIS (note 32) | 7,401,158 | 14,201,085 | ||||||||
Number of ordinary shares assuming exercise of all potential ordinary shares | 727,125,834 | 779,166,208 | ||||||||
2014 | 2013 | |||||||||
US$ | US$ | |||||||||
Net asset value per share | 1.01 | 1.22 | ||||||||
Fully diluted net asset value per share | 0.98 | 1.16 | ||||||||
Adjusted net asset value per share | 1.10 | 1.32 | ||||||||
Adjusted fully diluted net asset value per share | 1.06 | 1.26 | ||||||||
As the preference shares are considered to be capital for capital risk management (see note 35d) unrealised foreign exchange movements on these have been adjusted when calculating adjusted NAV per share.
| ||||||||||
32. Share-based payments and other long term incentives
The Group utilises a number of different Share Schemes to reward and incentivise the Group's executives and senior staff. The Share Schemes operated in the year are as follows:
Executive Share Option Schemes ("ESOS") The Group operates two ESOS, the Employee Retention Scheme ("ERS") and the Long Term Incentive Plan ("LTIP"). Both schemes involved the grant of options over the Company's ordinary shares by the Company's Employee Benefit Trusts. The ERS vested in full on the publication of the audited financial statements of the Company for the year ended 31 December 2010 and the ERS options do not have an exercise price. The LTIP options vested in three equal tranches, subject to performance criteria, on 24 March 2012, 2013 and 2014. The LTIP options have an exercise price of 25p per option and have vested in full. Both the ERS and LTIP schemes are closed and further awards cannot be made under either scheme. Awards made under the ERS and LTIP have been accounted for in accordance with the Group's accounting policy for Share-based payments.
Combined Bonus and Long Term Incentive Scheme 2012 to 2014 ("CBLTIS") During 2012 the Group implemented the CBLTIS and contingent awards were made in respect of 14.3 million ordinary shares and 3.7 million preference shares and which cover the calendar years 2012 to 2014. The awards are subject to performance criteria linked to operating cash income. Awards in respect of ordinary shares are accounted for in accordance with the Group's accounting policy for Share-based payments. Awards to be settled by preference shares do not meet the criteria under IFRS for a Share-based payment and are instead accounted for in accordance with IAS 19 - Employee Benefits.
In 2013 the Company made a discretionary bonus award of 121,429 ordinary shares to certain senior managers below Board level.
| ||||||||||
(a) Movements in Executive Share Option Schemes | 2014 | 2013 | ||||||||
Weighted | Weighted | |||||||||
average | average | |||||||||
No of | exercise | No of | exercise | |||||||
options | price | options | price | |||||||
Outstanding at the beginning of the period | 7,037,613 | 24p | 10,104,279 | 22p | ||||||
Exercised during the year | ||||||||||
- ERS | - | 0p | (1,000,000) | 0p | ||||||
- LTIP | (1,328,829) | 25p | (2,066,666) | 25p | ||||||
Outstanding at the end of the period | 5,708,784 | 24p | 7,037,613 | 24p | ||||||
Represented by: | ||||||||||
- ERS | 325,000 | 325,000 | ||||||||
- LTIP | 5,383,784 | 6,712,613 | ||||||||
5,708,784 | 7,037,613 | |||||||||
Exercisable at the end of the period | 5,708,784 | 24p | 4,022,295 | 23p | ||||||
The weighted average remaining contractual life of options was 3 years (2013: 4 years). | ||||||||||
(b) Movements in Combined Bonus and Long Term Incentive Scheme 2012 to 2014 Awards | ||||||||||
2014 | 2013 | |||||||||
No of award | No of award | |||||||||
shares | shares | |||||||||
Awards of Ordinary shares: | ||||||||||
- Outstanding at the beginning of the period | 14,201,085 | 14,287,398 | ||||||||
- Granted during the year | - | - | ||||||||
- Lapsed during the year | (45,259) | (86,313) | ||||||||
- Vested during the year | (6,754,668) | - | ||||||||
- Outstanding at the end of the period | 7,401,158 | 14,201,085 | ||||||||
The fair value at grant date of the ordinary share awards in 2012 was determined to be the closing market price of 59.5p. | ||||||||||
2014 | 2013 | |||||||||
No of award | No of award | |||||||||
shares | shares | |||||||||
Awards of Preference shares: | ||||||||||
- Outstanding at the beginning of the period | 314,906 | 3,727,209 | ||||||||
- Granted during the year | - | - | ||||||||
- Lapsed during the year | - | (1,915) | ||||||||
- Vested during the year | (314,906) | (3,410,388) | ||||||||
- Outstanding at the end of the period | - | 314,906 | ||||||||
2014 | 2013 | |||||||||
(c) Income Statement charge for the year | US$'000 | US$'000 | ||||||||
Expense attributable to ERS and LTIP awards in prior periods | 136 | 518 | ||||||||
Bonus awards in the year | - | 133 | ||||||||
Combined Bonus and Long Term Incentive Scheme 2012 to 2014 awards | 2,218 | 6,983 | ||||||||
2,354 | 7,634 | |||||||||
To be satisfied by allocation of: | ||||||||||
Ordinary shares (IFRS 2 expense) | 2,425 | 3,428 | ||||||||
Preference shares (IAS 19 expense) | (71) | 4,206 | ||||||||
2,354 | 7,634 | |||||||||
33. Capital commitments
The Group has committed to fund the construction of certain additional investment property. At 31 December 2014, US$3.0 million of funding was required (2013: US$61.7 million), excluding VAT.
| ||||||||||
34. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Further disclosures concerning transactions with the Company's directors are made in the Remuneration Report and note 6. There are no loan balances with directors.
Preference share conversion offer In 2013 the Directors, and associated trusts and pension funds, participated in the preference share conversion offer converting the following number of preference shares: | ||||||||||
Number of | ||||||||||
Preference | ||||||||||
Shares converted | ||||||||||
A Bilton | 19,192,647 | |||||||||
G Hirsch | 2,086,517 | |||||||||
R Jewson | 72,577 | |||||||||
C Sherwell | 104,544 | |||||||||
S Coe | 10,000 | |||||||||
D Moore | 44,313 | |||||||||
Remuneration of Directors and other key management personnel | 2014 | 2013 | ||||||||
US$'000 | US$'000 | |||||||||
Short term employee benefits | 4,613 | 4,154 | ||||||||
Post employment benefits | 341 | 315 | ||||||||
Share-based payments and other long term incentives | 2,181 | 6,916 | ||||||||
7,135 | 11,385 | |||||||||
35. Financial instruments - risk management
The Group's activities expose it to a variety of financial risks in relation to the financial instruments it uses: market risk (including currency risk, price risk and cash flow interest rate risk), credit risk and liquidity risk. The financial risks relate to the following financial instruments: trade receivables, cash and short term deposits, trade and other payables, borrowings, preference shares and derivative financial instruments.
Risk management parameters are established by the Board on a project by project basis and overseen by management in conjunction with professional advisers. Reports are provided to the Board formally on a weekly basis and also when authorised changes are required.
| ||||||||||
(a) Market risk | ||||||||||
Currency risk The Group operates internationally and is exposed to foreign exchange risk arising from a variety of currency exposures, primarily with respect to US Dollars, Sterling and Russian Rouble. Foreign exchange risk arises from future commercial transactions (including construction contracts and lease receivables), recognised monetary assets and liabilities and net investments in foreign entities.
The majority of the Group's transactions are denominated in US Dollars, which is also the reporting currency for the Group. The functional currency of the Company is Sterling, however the functional currencies of the Company's subsidiaries vary. The analysis that follows considers the impact of Russian Rouble and Sterling on the Group.
Russian Rouble The rapid depreciation of the Rouble over the year end has heightened the Group's currency risk. The Balance Sheet at 31 December 2014 reflects a US$45 million reduction in the US Dollar equivalent value of the Group's opening Rouble net assets, included in movements through the translation reserve. The Income Statement includes a US$19 million loss on the Rouble value of net US Dollar denominated liabilities in those subsidiaries with Rouble functional currency.The Group holds sufficient Rouble currency to cover Rouble denominated overheads and any future construction cost commitments.The weak Rouble also has an impact on property values as explained in note 13 to the accounts and increased credit risk as explained below.
Sterling The Group's exposure to Sterling is primarily driven by the Sterling denominated preference shares and the related quarterly preference dividends, but also head office costs and ordinary dividends. Whilst there are no Sterling foreign exchange gains and losses arising in the parent company itself, in preparing the group financial statements these Sterling amounts are translated to the Group's US Dollar presentation currency and the resulting exchange gains and losses are included in the translation reserve.
The table below summarises the currency in which the Group's financial instruments are denominated:
| ||||||||||
Russian | ||||||||||
As at 31 December 2014 | US Dollar | Sterling | Rouble | Other | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Non-current assets | ||||||||||
Loans receivable | - | 1,029 | - | - | 1,029 | |||||
Security deposits | 4,596 | - | - | - | 4,596 | |||||
Restricted cash | 10,640 | - | 15,689 | - | 26,329 | |||||
Derivative financial instruments | 5,819 | 1,034 | - | - | 6,853 | |||||
Current assets | ||||||||||
Trade receivables | 33,116 | 10 | 3,333 | - | 36,459 | |||||
Derivative financial instruments | - | 432 | - | - | 432 | |||||
Other current receivables | - | 71 | 703 | 4 | 778 | |||||
Cash and short term deposits | 116,502 | 11,070 | 38,632 | 5,179 | 171,383 | |||||
170,673 | 13,646 | 58,357 | 5,183 | 247,859 | ||||||
Non-current liabilities | ||||||||||
Interest bearing loans and borrowings | 837,429 | - | - | - | 837,429 | |||||
Preference shares | - | 164,300 | - | - | 164,300 | |||||
Derivative financial instruments | 1,963 | - | 2,190 | - | 4,153 | |||||
Rent deposits | 28,373 | - | 1,281 | 595 | 30,249 | |||||
Other payables | 23 | - | 7,323 | - | 7,346 | |||||
Current liabilities | ||||||||||
Interest bearing loans and borrowings | 55,252 | - | - | - | 55,252 | |||||
Derivative financial instruments | - | - | 1,253 | - | 1,253 | |||||
Rent deposits | 8,053 | - | 14 | - | 8,067 | |||||
Other payables | - | 2,354 | 25,600 | 22 | 27,976 | |||||
931,093 | 166,654 | 37,661 | 617 | 1,136,025 | ||||||
Russian | ||||||||||
As at 31 December 2013 | US Dollar | Sterling | Rouble | Other | Total | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Non-current assets | ||||||||||
Loans receivable | - | 1,261 | - | - | 1,261 | |||||
Security deposits | 4,781 | - | - | - | 4,781 | |||||
Restricted cash | 50,000 | - | - | - | 50,000 | |||||
Derivative financial instruments | 5,924 | 4,342 | - | - | 10,266 | |||||
Current assets | - | |||||||||
Trade receivables | 29,450 | 3,521 | 4,649 | - | 37,620 | |||||
Derivative financial instruments | - | 1,519 | - | - | 1,519 | |||||
Other current receivables | - | 358 | 265 | 15 | 638 | |||||
Cash and short term deposits | 109,140 | 22,578 | 60,372 | 9,234 | 201,324 | |||||
199,295 | 33,579 | 65,286 | 9,249 | 307,409 | ||||||
Non-current liabilities | ||||||||||
Interest bearing loans and borrowings | 721,311 | - | - | - | 721,311 | |||||
Preference shares | - | 172,205 | - | - | 172,205 | |||||
Derivative financial instruments | 4,413 | - | - | - | 4,413 | |||||
Rent deposits | 22,062 | - | 2,191 | 484 | 24,737 | |||||
Other payables | 3,161 | - | 11,809 | - | 14,970 | |||||
Current liabilities | - | |||||||||
Interest bearing loans and borrowings | 81,803 | - | - | - | 81,803 | |||||
Derivative financial instruments | - | - | - | - | - | |||||
Other payables | - | 4,104 | 26,560 | 22 | 30,686 | |||||
832,750 | 176,309 | 40,560 | 506 | 1,050,125 | ||||||
The sensitivity analyses below are based on a change in an assumption while holding all other assumptions constant. In practice this is unlikely to occur and changes in some of the assumptions may be correlated, for example a change in interest rate and a change in foreign currency exchange rates. The Group principally manages foreign currency risk on a project by project basis. The sensitivity analysis prepared by management of foreign currency risk illustrates how changes in the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The table below shows the impact on consolidation if the US Dollar weakened or strengthened by 10% against the Russian Rouble or Sterling, with all other variables in each case remaining constant, then:
| ||||||||||
2014 | 2013 | |||||||||
Post tax profit or loss would change by: | US$'000 | US$'000 | ||||||||
Russian Rouble | 1,435 | 367 | ||||||||
Sterling | 4,358 | 6,719 | ||||||||
Net asset value would change by: | ||||||||||
Russian Rouble | 635 | 2,082 | ||||||||
Sterling | 7,512 | 10,820 | ||||||||
The majority of Sterling sensitivity relates to the retranslation of the value of irredeemable preference shares.
Accounting standards also require disclosure of monetary assets and liabilities that are denominated in currencies different from the functional currency of the specific subsidiary or entity in the Group. These are set out in the tables below.
| ||||||||||
Russian | ||||||||||
As at 31 December 2014 | US Dollar | Sterling | Rouble | Other | ||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||
Current assets | ||||||||||
Trade receivables | 3,070 | - | - | - | ||||||
Cash and short term deposits | 72,333 | - | - | 5,251 | ||||||
75,403 | - | - | 5,251 | |||||||
Current liabilities | ||||||||||
Interest bearing loans and borrowings | 5,000 | - | - | - | ||||||
Rent deposits | 8,053 | |||||||||
13,053 | - | - | - | |||||||
Non-current liabilities | ||||||||||
Interest bearing loans and borrowings | 23,750 | - | - | - | ||||||
Rent deposits | 28,373 | |||||||||
52,123 | - | - | - | |||||||
Russian | ||||||||||
As at 31 December 2013 | US Dollar | Sterling | Rouble | Other | ||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||
Current assets | ||||||||||
Trade receivables | 1,851 | - | - | - | ||||||
Cash and short term deposits | 96,044 | - | 5,968 | 6,373 | ||||||
97,895 | - | 5,968 | 6,373 | |||||||
Current liabilities | ||||||||||
Interest bearing loans and borrowings | 1,250 | - | - | - | ||||||
1,250 | - | - | - | |||||||
Non-current liabilities | ||||||||||
Interest bearing loans and borrowings | 28,750 | - | - | - | ||||||
28,750 | - | - | - | |||||||
The Group's interest rate risk arises from long-term borrowings (note 22), which include preference shares issued (note 23). Borrowings issued at variable rates expose the Group to cash flow interest rate risk, whilst borrowings issued at a fixed rate expose the Group to fair value risk. The Group's cash flow and fair value risk is reviewed monthly by the Board. The cash flow and fair value risk is approved monthly by the Board.
The Group analyses its interest rate exposure on a dynamic basis. It takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest costs may increase as a result of such changes. They may reduce or create losses in the event that unexpected movements arise. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios the Group calculates the impact on profit and loss of a defined interest rate shift. The simulation is run on an on-going basis to verify that the maximum potential impact is within the parameters expected by management. Formal reporting to the Board on cash flows is made on a monthly basis.
To date the Group has sought to fix its exposure to interest rate risk on borrowings through fixed rate debt facilities, the use of a variety of interest rate derivatives and the issue of preference shares at a fixed coupon. This gives certainty over future cash flow but exposure to fair value movements, which amounted to an accumulated unrealised loss of US$7.9 million at 31 December 2014 (2013: loss of US$7.3 million).
Sensitivity analysis on the Group's interest rate borrowings, net of interest bearing deposits, indicate that a 1% increase in LIBOR rates would increase the loss for the year and decrease net assets by US$2.2 million (2013: US$1.6 million). If LIBOR rates were to drop to zero then there would be an decrease in the loss for the year and an increase in net assets of US$0.7 million (2013: decrease of US$1.7 million) as the loss on income from cash would be greater than gains on interest expense because of the low LIBOR rates prevailing at this time and the interest rate hedges in place.
| ||||||||||
(b) Credit risk | ||||||||||
The Group's principal financial assets are cash and short term deposits, trade and other receivables and derivative financial instruments.
Credit risk associated with the Group's trade and other receivables has increased during the year. The Group transacts with tenants using US Dollar pegged leases, passing foreign exchange risk on to the tenant in exchange for lower US CPI indexation. The rapid weakening of the Rouble over the year end has meant that the foreign exchange risk carried by tenants has increased significantly. This may result in some tenants struggling to meet rental obligations. The Group has policies in place to ensure that rental contracts are made with tenants meeting appropriate Balance Sheet covenants, supplemented by rental deposits or bank guarantees from international banks. No significant doubtful receivables existed at the year end and the amounts presented in the Balance Sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the terms of the receivables concerned. Details of the movements in provision for impairment of trade receivables is provided in the table below.
| ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
At 1 January | 377 | 1,970 | ||||||||
Charge for the year | 214 | - | ||||||||
Utilised in the year | - | (1,418) | ||||||||
Unused amounts reversed | - | (175) | ||||||||
At 31 December | 591 | 377 | ||||||||
At 31 December 2014 there were no significant amounts of trade receivables that were past due for collection (2013: US$ nil).
The Group has VAT recoverable of US$16 million (2013: US$17 million). The timing of recovery of these balances is subject to future revenue receipts and application to the Russian Courts. The Group forecasts the recovery of these balances based upon the timing of future revenue receipts and its experience of successful application to the Russian Courts. No balances are considered past due or impaired at 31 December 2014 (2013: US$ nil) based upon this assessment of the timing of future cash receipts. The Group believes its only exposure is in relation to the timing of recovery.
The credit risk of the Group's cash and short term deposits and derivative financial instruments is limited to the Group's policy of monitoring counterparty exposures.
| ||||||||||
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Board and its advisers seek to have appropriate credit facilities in place on a project by project basis, either from available cash resources or from bank facilities.
Management monitor the Group's liquidity position on a daily basis. Formal liquidity reports are issued from all jurisdictions on a weekly basis and are reviewed monthly by the Board, along with cash flow forecasts. A summary table with maturity of financial liabilities is presented below.
All amounts shown are gross undiscounted cash flows.
| ||||||||||
Financial liabilities | ||||||||||
As at 31 December 2014 | Total | Current | Year 2 | Years 3 to 5 | Years 6 to 10 | |||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Interest bearing loans and borrowings | 1,184,565 | 124,394 | 234,590 | 531,967 | 293,614 | |||||
Preference shares | 183,468 | 18,347 | 18,347 | 55,040 | 91,734 | |||||
Derivative financial instruments | 5,406 | 1,253 | - | 4,153 | - | |||||
Head leases | 5,617 | 562 | 562 | 1,685 | 2,808 | |||||
Trade and other payables | 66,294 | 36,044 | 7,395 | 14,756 | 8,099 | |||||
1,445,350 | 180,600 | 260,894 | 607,601 | 396,255 | ||||||
As at 31 December 2013 | ||||||||||
Interest bearing loans and borrowings | 1,079,815 | 145,432 | 109,836 | 600,962 | 223,585 | |||||
Preference shares | 193,547 | 19,355 | 19,355 | 58,064 | 96,773 | |||||
Derivative financial instruments | 4,700 | - | - | 4,700 | - | |||||
Head leases | 9,030 | 903 | 903 | 2,709 | 4,515 | |||||
Trade and other payables | 108,584 | 31,825 | 54,041 | 14,478 | 8,240 | |||||
1,395,676 | 197,515 | 184,135 | 680,913 | 333,113 | ||||||
Details of the interest rates applicable to the Group's long term borrowings and preference shares are given in notes 22 and 23. The Group is subject to interest costs in perpetuity in respect of preference shares, which have no contractual maturity date. The table above does not show cash flows beyond 10 years.
The Group monitors its risk to a shortage of funds by forecasting cash flow requirements for future years. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and other short term borrowing facilities, bank loans and equity fund raisings.
Fair values
Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments in the financial statements.
| ||||||||||
2014 | 2013 | |||||||||
Carrying | Fair | Carrying | Fair | |||||||
Value | Value | Value | Value | |||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||
Non-current assets | ||||||||||
Loans receivable | 1,029 | 958 | 1,261 | 1,180 | ||||||
Security deposits | 4,596 | 4,596 | 4,781 | 4,781 | ||||||
Restricted cash | 26,329 | 26,329 | 50,000 | 50,000 | ||||||
Derivative financial instruments | 6,853 | 6,853 | 10,266 | 10,266 | ||||||
Current assets | ||||||||||
Trade receivables | 36,459 | 36,459 | 37,620 | 37,620 | ||||||
Other current receivables | 778 | 778 | 638 | 638 | ||||||
Derivative financial instruments | 432 | 432 | 1,519 | 1,519 | ||||||
Cash and short term deposits | 171,383 | 171,383 | 201,324 | 201,324 | ||||||
Non-current liabilities | ||||||||||
Interest bearing loans and borrowings | 837,429 | 593,480 | 721,311 | 524,269 | ||||||
Preference shares | 164,300 | 183,467 | 172,205 | 255,561 | ||||||
Derivative financial instruments | 4,153 | 4,153 | 4,413 | 4,413 | ||||||
Rent deposits | 30,249 | 22,736 | 24,737 | 17,979 | ||||||
Other payables | 7,346 | 7,346 | 14,970 | 14,970 | ||||||
Current liabilities | ||||||||||
Interest bearing loans and borrowings | 55,252 | 55,252 | 81,803 | 81,803 | ||||||
Derivative financial instruments | 1,253 | 1,253 | - | - | ||||||
Other payables | 27,977 | 27,977 | 30,686 | 30,686 | ||||||
The fair values of loans receivable and borrowings have been calculated by discounting the expected future cash flows at prevailing interest rates. The fair value of short term deposits, other assets, trade and other receivables, trade and other payables is assumed to approximate to their book values. The fair value of preference shares is assumed to be their last quoted price. The fair value of derivatives is determined by a model with market based inputs.
(d) Capital risk management
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
For capital risk management, the Directors consider both the ordinary and preference shares to be permanent capital of the Company, with similar rights as to cancellation.
To maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, undertake tender offers, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in its industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total liabilities but excluding provisions, head lease obligations and preference shares, which for capital risk management is considered to be capital rather than debt, less cash and short term deposits. Total capital is calculated as equity, as shown in the balance sheet, plus preference shares and net debt. Where the Group has a net cash position, the gearing ratio will be zero.
| ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
Non-current liabilities | 960,972 | 869,108 | ||||||||
Current liabilities | 141,433 | 183,381 | ||||||||
Total borrowings | 1,102,405 | 1,052,489 | ||||||||
Less: cash and short term deposits | 171,383 | 201,324 | ||||||||
Net debt | 931,022 | 851,165 | ||||||||
Equity | 697,289 | 891,919 | ||||||||
Preference shares | 164,300 | 172,205 | ||||||||
Total capital | 1,792,611 | 1,915,289 | ||||||||
Gearing ratio | 51.94% | 44.44% | ||||||||
36. Fair value measurement
The following table provides the fair value measurement hierarchy* of the Group's assets and liabilities. | ||||||||||
Total Fair | ||||||||||
Level 1 | Level 2 | Level 3 | Value | |||||||
As at 31 December 2014 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||
Assets measured at fair value | ||||||||||
Investment property | - | - | 1,593,684 | 1,593,684 | ||||||
Investment property under construction | - | - | 47,958 | 47,958 | ||||||
Derivative financial instruments | - | 7,285 | - | 7,285 | ||||||
Liabilities measured at fair value | ||||||||||
Derivative financial instruments | - | 5,406 | - | 5,406 | ||||||
As at 31 December 2013 | ||||||||||
Assets measured at fair value | ||||||||||
Investment property | - | - | 1,632,476 | 1,632,476 | ||||||
Investment property under construction | - | - | 118,919 | 118,919 | ||||||
Derivative financial instruments | - | 11,785 | - | 11,785 | ||||||
Liabilities measured at fair value | ||||||||||
Derivative financial instruments | - | 4,413 | - | 4,413 | ||||||
* Explanation of the fair value hierarchy:
| ||||||||||
Level 1 - Quoted prices in active markets for identical assets or liabilities that can be accessed at the balance sheet date.
Level 2 - Use of a model with inputs that are directly or indirectly observable market data.
Level 3 - Use of a model with inputs that are not based on observable market data.
The Group's foreign currency derivative financial instruments are call options and are measured based on spot exchange rates, the yield curves of the respective currencies as well as the currency basis spreads between the respective currencies. The Group's interest rate derivative financial instruments comprise swap contracts and interest rate caps. These contracts are valued using a discounted cash flow model and where not cash collateralised consideration is given to the Group's own credit risk.
There have been no transfers between level 1 and level 2 during the year or the prior year.
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37. Subsequent events
Details of post year end warrant exercises are set out in note 28.
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38. Operating lease arrangements
The Group earns rental income by leasing its investment properties to tenants under non-cancellable operating leases. At the Balance Sheet date the Group had contracted with tenants for the following future minimum lease payments:- | ||||||||||
2014 | 2013 | |||||||||
US$'000 | US$'000 | |||||||||
Within one year | 172,108 | 171,396 | ||||||||
In the second year | 142,252 | 159,851 | ||||||||
In the third to fifth year (inclusive) | 252,843 | 312,505 | ||||||||
After five years | 79,540 | 135,743 | ||||||||
646,743 | 779,495 | |||||||||
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