Full Year Results

12 March 2014

MIRLAND DEVELOPMENT CORPORATION PLC

("MirLand" / "Company")

FULL YEAR RESULTS FOR THE 12 MONTHS TO 31 DECEMBER 2013

MIRLAND RETURNS TO FULL YEAR PROFIT FOLLOWING STRONG RESIDENTIAL SALES

MirLand Development Corporation Plc, one of the leading international residential and commercial property developers in Russia, announces results for the 12 months ended 31 December 2013.

Financial Highlights:

· Total revenues up 147.1% to US$103.8 million (31 December 2012: US$42.0 million) due to the first time partial recognition of revenues from the Triumph Park residential project, 99% occupancy across the investment portfolio and the positive impact of rental indexation;

· Net operating income ("NOI") from investment properties (Company's share) up 21.9% to US$33.4 million (31 December 2012: US$27.4 million);

· Gross profit up 542% to US$39.8 million (31 December 2012: US$6.2 million) ;

· EBITDA increased 137.1% to US$24.9 million (31 December 2012: US$10.5 million);

· Net profit of US$6.2 million (2012: loss of US$42.3 million) due to increased operational profitability, decrease in general and administrative expenses, recognition of revenues in residential projects and fair value adjustments of investment properties;

· Total assets of US$853.1 million up by 14.7% (31 December 2012: US$743.7 million), of which 90% are property and land assets; 

· Total equity increased by 4.5% to US$331.7 million (31 December 2012: US$317.3 million), equating to 39% of total assets;

· Net leverage remained low at 41.9% of total assets (31 December 2012: 40.9%).

Operational Highlights

Residential:

Triumph Park,St. Petersburg

Sales rate remains high with prices of later phases increasing ahead of inflation:

· Phase I: All 510 apartments pre-sold, representing income of approximately US$66 million, of which US$55 million was recognized during H2 2013, in accordance with IFRS standards, with the remainder to be recognized in Q1 2014; an occupancy permit was received from the governmental authorities and delivery of apartments to owners has now completed;

· Phase II: Launched in Q3 2012, 522 out of a total of 630 apartments (circa 83% of the scheme) had been pre-sold by 12 March 2014. This represents sales of approximately US$67 million. Completion is expected by Q4 2014;

· Phase III: Strong sales launch in Q4 2013, with 303 out of 1,346 homes pre-sold by 12 March 2014, totalling circa 23% of the scheme, representing sales of approximately US$32 million.

Western Residence, Perkhushkovo, Moscow

· We have also sold a further five houses at our Western Residence development in Perkhushkovo, Moscow, taking the total number of units sold to 30 of the 77 houses in the scheme.

Retail:

· Both regional shopping centres, Vernissage Mall in Yaroslavl and Triumph Mall in Saratov, are 100% occupied and continue to report high levels of footfall. Annual NOI was up 16% to US$19.7 million (2012: US$ 17.0 million), the strongest ever performance from the retail portfolio;

· On 23 December, 2013 the Company signed an agreement (the "Agreement") to acquire the outstanding 49.5% of the shares in Vernissage Mall, which it did not previously own.

· Planning at advanced stages to extend Vernissage Mall by an additional 30,000 sqm

Offices:

· 96% average occupancy rate at the MirLand Business Center. Annual like for like NOI up 32% to US$13.7 million.

Nigel Wright, Chairman, commented:

"2013 was a landmark year for MirLand, as the company returned to strong profitability. This was driven by the first recognition of profits from our flagship residential development scheme, Triumph Park in St. Petersburg, where we have achieved excellent sales levels and in the autumn delivered the first finished units from Phase I. Sales have continued at a good rate, and we expect the next phases of the scheme to generate high levels of income over the coming years.

"Our commercial investment portfolio, under the management of our specialist in-house team, has also continued to perform strongly, with very high occupancy rates and good income growth during the year.

Mirland is now strongly positioned financially and operationally to capitalise on an excellent set of results, and, with a high quality portfolio of assets and a pipeline of development projects in place, I am confident that we will continue to generate value on behalf of our shareholders as we move forward."

For further information, please contact:

Chairman's Statement

MirLand has continued to deliver solid progress during the 2013 financial year with further operational and financial milestones achieved across the business, in accordance with our strategy:

· To maximize returns from our existing assets;

· Successfully complete projects currently under construction; and

· Activate pipeline projects and selectively seek new projects subject to availability of appropriate funding and market demand.

As liquidity in the Russian lending market has improved, MirLand has been able to secure new bank financing and refinancing for existing facilities.

FINANCING

During the period, net leverage slightly increased to 41.9% of total assets (31 December 2012: 40.9%) but still remains relatively low. Total net borrowings amounted to US$357.7 million (31 December 2012: US$304.2 million).

On May 19 2013, Mashinostroenie & Hydravlika OJSC ("the Subsidiary") entered into a loan agreement with Sberbank of Russia ("the Bank") under which the Bank will grant the Subsidiary a credit line in an aggregate amount of up to US$19 million. The Loan is for a period of approximately 6.5 years and bears fixed dollar interest at the rate of 8.75% per annum, payable quarterly, in addition to other commissions as set out in the Loan agreement.

In July 2013, following the publication of an amendment to the Company's shelf prospectus and shelf offering report, the Company issued new debentures (Series E) in the total amount of NIS240 million (approximately US$67.2 million). The debentures (Series E) bear annual fixed interest of 7.21% and have been rated by Midroog at "ilBaa1/Stable". The debentures are repayable in five unequal annual payments, the first payment is 10% of the principal and each of the second to the fifth payments is 22.5% of the principal, payable on 31 May of each year from 2016 to 2020 (inclusive).

In August 2013, a wholly owned subsidiary of the Company, Limited liability Company Investicionno-Ipotechnaya Kompaniya ("IIK"), entered into a US$95 million loan agreement with Sberbank for a seven year term, at fixed interest rate of 7%, payable quarterly. The loan refinances IIK's existing debt of US$36 million and allows the business to release additional funds. The loan is secured by various mortgages, charges, pledges and other customary security interests for the benefit of the bank which have been entered into by both IIK and the Company. The loan will be repaid within seven years through regular quarterly payments and a final balloon payment of 53% of the loan principal at the end of the term.

In August and October 2013, the Company partly repaid a number of short-term loans from banks which are secured by non-cancelable bank guarantees of the controlling shareholders for US$50 million.

On 30 October 2013, the Company successfully financed the third phase of 1,346 apartments at Triumph Park. Petra 8 LLC ("Petra"), a wholly owned subsidiary, entered into a loan agreement with Sberbank, which had also financed the previous two phases. The loan agreement comprises a non-revolving credit line of up to US$96 million, which will provide approximately 70% of the expected third phase construction costs, with the balance financed from sale proceeds. It fulfills the outstanding funding requirement for this latest phase of the project and will be provided to Petra in three tranches over the next three years, secured by way of mortgage, charge, pledge and other appropriate security interests for the benefit of the Bank. The Loan, which matures in four years, is in addition to two facilities previously granted by the Bank to Petra. The outstanding balance, to date, is approximately US$4 million.

The net proceeds of the Bonds D and E issuances, as well as loans obtained by subsidiaries, will be applied for general working capital purposes and repayment of certain financial liabilities including, inter alia, bank loans guaranteed by Parent Companies, Bonds and loans provided to subsidiaries in Russia.

The recent capital raisings from the bonds support the Company's strategy to diversify funding sources whilst keeping long term leverage at a relatively low level, with net leverage currently at 41.9%.

OPERATIONAL UPDATE

The Company has made good progress in the pre-sale, build and delivery of its BREEAM certified Green residential project, Triumph Park in St. Petersburg. The government authorities issued the required occupancy permit for Phase I of the scheme, and handovers to owners that began in September 2013 are now completed. Construction and sales of Phase III started in October with a strong sales launch resulting in 303 apartments being pre-sold in the first five months since launch. The prices that the Company is achieving on the pre-sales of these later phases of the project are ahead of the rate of inflation as the scheme has progressed, underpinning good levels of profitability for the project.

The Western Residence residential development scheme at Perkhushkovo, Moscow, has also maintained momentum with the sales of further five houses, taking the total now sold to 30 of the 77 houses in the scheme.

 Vernissage Mall in Yaroslavl and the Triumph Mall in Saratov are fully let and continue to generate high footfall. Occupancy rates in the MirLand Business Centre office buildings remain at circa 96%. Our retail portfolio delivered its highest ever level of net operational income, remaining fully occupied and with rental indexation delivering increased revenues. In light of the success of our retail portfolio, we are looking at potential opportunities to grow our holdings in the sector through the extension of our Vernissage Mall by an additional 30,000 sqm, to include a cinema and new anchor home and clothing stores. MirLand is also seeking new opportunities in this segment.

In December, 2013 the Company signed an agreement (the "Agreement") to acquire the outstanding 49.5% of shares in Vernissage Mall that it did not previously own. Under the Agreement, the Company made ​​an advance payment to the Seller of US$3 million. The remaining consideration for the Acquired Shares shall be paid within seven business days after fulfillment of all conditions precedent to the transaction under the Agreement, including the receipt of certain regulatory approvals and obtaining bank financing by the Company to purchase the Acquired Shares. The total consideration for the Acquired Shares will be calculated according to a value of US$85.5 million, offset by a number of loans (the balance of which is approximately US$27 million) as of December 2013. Calculation of the consideration will be performed at the closing of the transaction. Such value shall be subject to certain adjustments that may occur as a result of the fluctuations of the US Dollar - Russian Rouble exchange rate.

On 4 March 2014,the condition precedent requiring approval by the Antitrust Commissioner in Russia was received and it was confirmed that the Company was entitled to proceed with the transaction. On 7 March 2014, as a result of this approval, the Company entered into an Amendment to the Purchase Agreement. Based on the terms of the Amendment, the Company assigned its rights and obligations under the Purchase Agreement to a subsidiary. This subsidiary paid the Seller, on the same day, a purchase price of approximately US$25 million and fixed the exchange rate of the Rouble against the US Dollar. Completion of the transaction and the transfer of the shares are still subject to receipt of bank financing, which would trigger the Seller's obligation to return the Company's down payment of US$3 million, as mentioned above.

Results 

Total assets as at 31 December 2013 increased by 14.7% to US$853.1 million as compared to US$743.7 million as of 31 December 2012. Equity as at 31 December 2013 was US$331.7 million compared to US$317.3 million the preceding year. 

Net Income for the year was US$6.2 million (31 December 2012: loss of US$42.3 million), following the profit recognition from the first phase of the Triumph Park project, the increase in the value of yielding office and retail investment properties as a result of improved market conditions and improved operational results.

Over the period, net operating income ("NOI") from investment properties increased by 22% to US$33.4 million (31 December 2012: US$27.4 million) due to high occupancy, reduced operating expenses and increased income from rent indexation.

MirLand's assets are externally valued semi-annually on 30 June and 31 December. The valuation is conducted by Cushman & Wakefield. As a result of market improvement and improved operational results during this period, the value of MirLand's portfolio (Company's share) increased by approximately 1.5% to US$880.7 million at 31 December 2013 (31 December 2012: US $868.0 million). Adjusted NAV, based on Cushman & Wakefield's valuation, was US$556.7 million (31 December 2011: US$544.8 million), an increase of 2.2%. The growth can be largely attributed to an increase in the valuation of the St. Petersburg's project due to the significant progress made during the year in terms of sales, construction and financing, as well as a net increase in the value of the Company's commercial portfolio helped by improved market conditions and record operational results.

These results underpin our belief that the Company's portfolio will deliver an attractive yield to our investors over the long term. 

Portfolio Development

In an improving business environment, MirLand's focus for 2013 was on delivery of its flagship residential project already under construction, careful management of its income-producing investment properties in order to decrease operational expenses, and the delivery of a high quality pipeline of development projects which are benefitting from strong occupier demand in the shortest time to market, as demonstrated by the progress we have made on the second phase of Vernissage Mall and the Kazan retail scheme.

Residential

MirLand has continued to make significant progress at its flagship residential led development, Triumph Park in St. Petersburg. In September of 2013, MirLand launched its sales campaign for Phase III of the scheme and has already pre-sold 303 out of 1,346 units, representing approximately 22% of the phase. The total net sellable area of Phase III of the project is approximately 62,500 sqm and there will be 1,300 sqm of retail space and two levels of underground parking providing 300 spaces. Completion of Phase III is planned for H1 2016. Following the launch of the sales campaign, the Company entered into a new loan agreement with Sberbank, which will provide a line of credit of approximately US$96 million to finance the construction of Phase III.

In addition, Phase II has continued to receive strong interest with 522 apartments sold to date out of a total of 630. This represents a projected income of approximately US$67 million which will be recognized in 2014, in accordance with IFRS standards.

All of the 510 Phase I apartments have now been sold, representing an income of approximately US$66 million, of which US$55 million was recognized during the second half of 2013 in accordance with IFRS standards. The remainder will be recognized in the first quarter of 2014.

The project offers high quality and competitively priced housing in St. Petersburg's strengthening residential market. Situated on a 40 hectare site, the project represents one of the few large scale developments in the city in close proximity to major transport links. Furthermore, the development is the first eco-residential complex in St. Petersburg certified by BREEAM, the world's leading assessment organization of green and sustainable construction. It will provide attractive features including ecologically friendly construction materials, energy efficient design, reduced CO2 emissions, water purification filters and high speed eco lifts certified according to ISO 14001. The flexibility of the apartment mix in terms of both range of sizes and fit-out options is designed to appeal to a wide range of purchasers.

In Q4 2011 the construction of Phase I of the Western Residence project in Perkhushkovo (77 houses out of 163) was completed and the houses are now being handed over to the buyers. To date, a total of 30 houses have been sold.

Retail

The Company owns two retail projects located in large prosperous regional cities. Both are fully occupied and enjoy high footfall throughout the year.

As part of our strategy to grow the retail segment of the portfolio, we are in the advanced planning stage of the construction of Phase II of the Vernissage Mall in Yaroslavl, and are currently in negotiations with an anchor tenants for the development. Separately, we are in advanced negotiations with a single tenant for a tailor-made theme store development which will be let on a long term lease agreement at Triumph House, a retail project in Kazan.

Offices

The office segment of the portfolio comprises four income-producing investment properties - Hydromashservice, MAG, Century Bld and Tamiz - all located at the MirLand Business Center, which provides good quality office space in Moscow. Most of the leasing agreements for the yielding assets are for long tenures and denominated in US Dollars and have annual indexation. During the year, occupancy rates increased in all of our income producing investment properties resulting in us achieving an overall average occupancy rate of approximately 96% for our office properties.

We have completed renovation works of the fire-damaged MAG building #26, and the renovated space has been leased to a single tenant for five years, starting at US$531 per sqm, including VAT, with an indexation of 5.75% annually.

Dividend Policy

MirLand has adopted a dividend policy that is intended to reflect long term earnings and cash flow potential while, at the same time, maintaining both prudent dividend cover and adequate capital resources within the business.

Despite the improvements in the Russian economy, and the Company's results, the Board believes that it is appropriate to retain maximum flexibility to invest in the opportunities available to it and therefore the Board has determined that it is inappropriate to declare a dividend for the financial year ended 31 December 2013.

The Board will continue to review the Company's dividend policy on an ongoing basis taking into consideration the Company's earnings and cash flows, including those anticipated to be generated during the current year ending 31 December 2014.

Our People

The Board of Directors and Senior Management team consist of dedicated individuals whose expertise has proved invaluable throughout this year. They have recommended and implemented positive and necessary changes to the business plan in light of rapidly changing economic circumstances and been involved in key decisions throughout.

As Chairman, I place considerable emphasis on rigorous Board management and, in addition to formal meetings, I meet and communicate with my colleagues on a regular basis.

Once again I would like to pay tribute to both my executive and non-executive Board colleagues and all our operating staff. Together they form the backbone of our business and I thank them for their continuing dedication, energy and achievement. Their efforts have ensured that the Company is well positioned to face the challenges of the future.

The Board of Directors and the management are fully committed to sound corporate governance. As in previous years, detailed information regarding our approach to governance issues, our internal controls and key team members will be provided in our Annual Report & Accounts.

Update to remuneration policy

During 2013 MirLand adopted a new remuneration policy, approved by the remuneration committee. As per this policy, the Company announced the re-issue to Chief Executive Officer Mr Roman Rozental of 449,198 options (in lieu of the same number) at the original exercise price of £2.50 on a fully vested basis and extended until 30 May 2017. In addition, the Chief Financial Officer, Mr Yevgeny Steklov received 258,750 new options at an exercise price of £2.60 vesting in equal tranches at the end of years one, two and three and expiring on the fifth anniversary of the date of grant.

Outlook

 "2013 was a landmark year for MirLand, as the company returned to strong profitability. This was driven by the first recognition of profits from our flagship residential development scheme, Triumph Park in St. Petersburg, where we have achieved excellent sales levels and in the autumn delivered the first finished units from Phase I. Sales have continued at a good rate, and we expect the next phases of the scheme to generate high levels of income over the coming years.

"Our commercial investment portfolio, under the management of our specialist in-house team, has also continued to perform strongly, with very high occupancy rates and good income growth during the year.

Mirland is now strongly positioned financially and operationally to capitalise on an excellent set of results, and, with a high quality portfolio of assets and a pipeline of development projects in place, I am confident that we will continue to generate value on behalf of our shareholders as we move forward."

Nigel Wright

Chairman

12 March 2014

Chief Executive's statement

2013 started with a positive outlook across most macroeconomic indicators in our markets, mainly due to the high price of oil and gas and the preparations for the Winter Olympic Games in Sochi. However, during the year the economic performance was affected by ongoing challenges in the European market, which led to decreasing demand for energy resources, and the easing of monetary policy in the United States, which had an impact on developing countries' exports. GDP growth in Russia in 2013 was 1.5%, while inflation remained moderate at 6.5% during the year.

There was more positive news from the retail trade and consumer markets, which performed much better than expected, and Russia remains the strongest retail market in Europe. Retail trade grew approximately 4% and disposable income grew approximately 3.5% during the year, mainly due to increases in the salaries in real terms of government officials and workers in the mining and extraction sectors.

About 73% of the population in Russia is based in urban areas and represents circa 85% of overall purchasing power. By 2015 it is expected that 82% of all households in Russia will be defined as middle class, as the income per household continue to rise. Consumer confidence in Russia is the third highest in Europe, after only Germany and Sweden. Although export prices for crude oil remained high during the year, industrial production in 2013 was similar to the previous year and fixed investment grew by only 0.2%. However, unemployment remained stable during the year at only 6%.

In spite of some economic challenges, Russia's government is well positioned to introduce steps to push the economy forward. Following the Sochi Winter Olympic Games, it is expected that it will introduce a stimulus package to support future growth. Russia has high reserves of foreign exchange and gold of US$538 billion. In addition, the level of government debt as a percentage of GDP is 14%, much lower than many OECD and other European countries.

It is not yet clear what impact the ongoing uncertainty involving Russia and the Ukraine will have on Russian markets and the wider European economy, but we are closely monitoring the situation and will keep this under review. 

Russian Real Estate Market

The real estate sector continued to perform well in 2013, supported by record construction levels and a strong consumer market. Investment into commercial real estate in 2013 made up US$7.45 billion, similar to the 2012 level, and Moscow was the third rated investment market in Europe by transaction volumes. Many transactions were in the process of finalization at the end of 2013, and similar levels of investment are anticipated in 2014.

As in previous years, investors were attracted to a range of segments across the commercial real estate sector. The volume of investment in the office sector grew by 7% and amounted to 41% of total investments. 2013 was a record year for investments in the retail sector, which grew by 25%, and its share was 35% of total investments. The main increase in investment volume during the year was in the industrial and warehouse sector, which achieved a record year, and more than doubled volumes in comparison to 2012.

Moscow remained the leading market for transactions with 72% of total investments. St. Petersburg's share was 6% and the remaining 22% was spread across other cities. The share of foreign investments during the year was 31%.

The positive trend in the real estate market led to slight compression in capitalization rates during the year. Capitalization rates reduced by 0.25% to 8.5% in the office sector, by 0.5% to 9% in the retail sector and by 0.5% to 11% in the industrial and warehouse sector.

The Office Sector

During 2013 the volume of supply in Moscow continued its steady increase and by the end of the year quality office stock totalled 13.85 million sqm, while 892,000 sqm entered the market. However, of the new office space, only 25% was class A and the rest was class B. New construction was mainly located outside the historical centre due to lack of available land plots and, reflecting the change in Moscow government policy, approximately half of the new supply was located outside the third transport ring.

The class B vacancy rate has been relatively stable during recent years and has increased by only 1% since 2011, reaching 10.3% by the end of 2013. However, in class A offices the vacancy rate has increased by 5% to 21.2 %. As tenants preferred to stay in their existing offices and to prolong their leasing agreements, there was a noticeable 20% drop in the volume of deals in 2013.

At the end of 2012 and at the beginning of 2013, market players expected positive dynamics and, as a result, rental rates saw 15% growth. However, in the second half of 2013 rental rates adjusted to the economic slowdown and, as a result, rental rates slowed, increasing by 7%-12% during the year, depending on the class and location of buildings. Average class B asking rental rates grew from US$460 to US$530 per sqm on a weighted average basis, but peaked at US$570 per sqm in the last quarter of the year.

The Retail Sector

Russia is the largest market in Europe with the largest retail turnover in EMEA -of US$611.8 billion in 2013. While modern retail space only started being developed about 10 years ago, shopping has become a cultural pastime for many. As a result, footfall in retail centres remains solid even during an economic downturn. The total existing good quality shopping centre stock in Russia is over 16.4 million sqm, which represents only 115 sqm per 1,000 inhabitants, well below the European average of 260 sqm. Most successful shopping malls have 100% occupancy with waiting lists from retailers. The majority of good quality projects are located in large cities, though during recent years developers have also increased their activity in cities with less than 500,000 people.

Retail sales in Russia grew by 4% during 2013, in line with rising real disposable income and with Russian consumers' confidence indicators, which are among the highest in Europe. In light of the good performance of the retail sector, retailer demand remained relatively strong during the year and they are actively looking to expand their activity and lease new space, both in Moscow and the regions. As of 2013, Russia has 58% of the key international brands.

In 2013, 63 new retail centres were delivered in Russia with total area of more than 1.6 million sqm, out of which 83% are outside of Moscow. Cities with a population of less than 1 million are actively developing, with 32 retail centres opening during the year in such cities.

Moscow retail gallery rental rates are in the range of US$500-4,000 per sqm annually, while, outside of Moscow, rental rates are typically 30% to 60% lower. Rental rates were stable during the year in spite the growing demand and low vacancy rates. During the year the vacancy rate at quality shopping malls was in the range of 1% to 1.5%.

In Saratov, the market is young and not yet stabilized. The area of quality retail space is only 140 sqm per 1,000 inhabitants and rental rate is in the range of US$ 400-800 per sqm annually 

In Yaroslavl, the retail sector has developed rapidly since 2004 but there is still a lack of good quality retail space, with just 300 sqm per 1,000 inhabitants. Almost all the large retailers active in Russia, both local and international, are active in the city and rental rates range from US$400 to US$800 per sqm annually.

The Residential Sector

The residential sector in Russia presents one of the best opportunities for growth due to the low level of living space per capita and a slowly developing mortgage market. The average area per capita is circa 23 sqm and the mortgage market amounts to only 3% of GDP, significantly lower than in western countries.

The residential sector in the Moscow region in 2013 benefited from the increased wealth of the population, resulting from an increase in real wages and positive consumer confidence, leading to growing market demand. In light of these trends, construction volume have risen during the year with 90 new projects in the Moscow region compared to 52 last year, which is a record high since 2008. However, as in 2012, no new projects of a 'prime' standard entered the market during the year.

During the year, construction costs remained stable for the Moscow region, with costs per 1 sqm of constructed space of US$4,800 for Elite class, US$3,400 for Business class and US$1,650 for Economy class.

Demand in St. Petersburg is characterised by growing demand for apartments outside the old city centre. Due to the improving standard of living in the city, demand continued to grow, leading to an increase in prices. Total demand for apartments in St. Petersburg and its suburbs during 2013 amounted to 3.9 million sqm, an increase of 21% on the previous year. Supply of new apartments also increased in line with current levels of demand.

Price increases in 2013 were lower than 2012 and ranged from 4% to 9% in Mass Market standard accommodation and 11% to 16% in Business standard. In addition, the mortgage market in the city continued its growth seeing a 25% increase during the year, supported by a growing number of apartments in the Economy segment of the market being sold together with a mortgage.

The Logistics Sector

Increasing retail sales and consumer confidence positively influenced the logistics sector. New construction in 2013 reached 850,000 sqm which was 16% higher than 2012 and at the highest level since 2008. Outside of the Moscow region, 40% of new space was delivered in St. Petersburg, 25% in the Krasnodar area, and rest was in Novosibirsk, Samara and Yekaterinburg.

Total stock in Russia reached 6.3 million sqm of class A and 2.4 million sqm of class B. However, there is still a lack of good quality supply in the market. Therefore, vacancy rate was less than 1.5% during the year, which is the same as the prior year.

The number of projects under development continued to increase as developers announced 1.8 million sqm to be completed in 2014. Taking into account that one of the distinctive features of the logistic sector is that construction is generally started one the preliminary lease or a forward sale has been achieved, most of the announced developments will be delivered to the market. It is expected that volume of new construction will increase but will not keep up with the growth in demand.

The yearly take up volume is growing every year. In 2013 the volume of take up in the Moscow region amounted to more than 1.3 million sqm which is a record high. Outside of the Moscow region, take up during the year was 410,000 sqm, representing a 62% increase compared to 2012, and a record high since 2008. This growth was mostly driven by retailers and logistics companies with 30% and 25% of the market share respectively.

In 2013 rental rates were stable in the Moscow region. However, other cities saw growth in rental rates during the year, and in some cities rental rates almost reached Moscow's levels of around US$120-125 per sqm annually.

Strategy

MirLand's principal activities are focused on the acquisition, development, construction, reconstruction, lease and sale of residential and commercial real estate in Russia. Its particular geographic focus is Moscow, St. Petersburg and major regional cities with a population of over 500,000 people. MirLand invests primarily in projects where it identifies potential for a high return on equity and the generation of strong yields and income, stemming from demand for good quality commercial and residential real estate assets.

The key elements of MirLand's strategy are as follows:

§ Focus on the completion of existing projects: The Company aims for the timely delivery of projects while ensuring they are completed to a high standard. Marketing of all of the Company's commercial projects is commenced during their development phase.

§ Portfolio Diversification: To mitigate risk, the Company's portfolio is balanced between various sectors, locations and development stages.

- Geographic location: investments are spread across Moscow, St. Petersburg, and other major regional cities. Investment decisions are made following a detailed feasibility study and the close examination of local and national economic and demographic data, as well as the balance between supply and anticipated demand for international standard properties.

- Sector: the Company invests in a balanced mix of residential, retail, office and logistics, as well as mixed-use projects.

- The Company's portfolio includes projects which are of varying duration, phasing and anticipated completion. The Company owns both yielding and development properties in order to obtain a relatively balanced spread in the use of working capital and demand for management's attention, that can, at the same time, generate an income flow from sales and yielding properties.

§ Realisation of assets: The Company will continuously assess whether to retain yielding properties or realise their market value through disposal, depending on the opportunity and on prevailing market conditions. The Company uses revenues from yielding assets to diversify its income sources.

§ Use of diverse financing sources to accelerate business activity and growth: Equity, shareholders' loans, corporate loans (some of which have been guaranteed by our main shareholders), project financing and bond issuances are used to finance the Company's activities and projects.

§ Enhancing business cooperation with local partners, especially in the regions: Having a local partner provides daily monitoring of the projects and thus a greater level of control over quality, costs and delivery for the Company. In addition, these relationships are expected to lead to future investment opportunities.

The global financial turmoil, which had a significant impact on the Russian real estate market, has led the Company to adjust its operational focus to be more directed on managing its core activities and available financial resources.

This has been achieved through:

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

· further phasing of larger projects;

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

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

· high prioritization of financing.

This strategy supports the Company's position as one of the leading international real estate companies in Russia. The backing of the Company's main shareholders, together with the diversification of financial sources, enables MirLand to continue to develop and maintain its portfolio and help support it in its mission of creating value for its shareholders.

In addition, provided favourable market conditions and an increase in availability of financing sources in Russia, when good opportunities arise the Company might consider increasing its portfolio through acquisitions of new real estate assets, either yielding or development projects, that can be delivered in a short time to the market.

Portfolio

MirLand currently has 13 projects, six of which are yielding assets (offices in Moscow and regional retail), one project is under construction (Phase II and Phase III of the Triumph Park project in St. Petersburg), two are completed residential projects (Phase I in Western Residence in Perkhushkovo and Triumph Park) and four projects are at various stages of planning and in the process of obtaining permits (in addition to the Phase II of the Western Residence project in Perkhushkovo and phases III-VI of the Triumph Park project in St. Petersburg). 

The Company's portfolio has been valued by Cushman & Wakefield at US$880.7 million (MirLand's share) as at 31 December 2013, based on the Company's freehold/leasehold rights. This value represents an increase of approximately 1.5% since 31 December 2012 and is mainly attributed to significant progress in the St. Petersburg project in terms of sales, construction and financing and improvement in operational results of yielding properties.

Yielding Projects:

Mirland Business Center comprisesClass B+ office buildings of Hydro, MAG, Century Buildings and Tamiz projects. The complex is located in the northern part of Moscow's Novoslobodsky business district. The site enjoys good transport links and excellent access.

Hydromashservice (Hydro), Moscow - offices

Class B+ office complex. Part of the MirLand Business Center

· Land area: 1.2 ha

· Leasable area: 16,700 sqm

· Completed: Q4 2008

· Leasehold rights of land: 100%

· Occupancy rate: 96%

· Financing: US$20 million financed by Sberbank in September 2012 (principal balance as of 31 December 2013: US$19 million) 

MAG, Moscow - offices

Class B+ office complex. Part of the MirLand Business Center.

· Land area: 2.2 ha

· Leasable area: 18,500 sqm

· Completed: Q4 2007

· Leasehold rights of land: 100%

· Occupancy rate: 98%

· Financing: US$40 million financed by Sberbank in September 2012 and June 2013 (principal balance as of 31 December 2013: US$39 million) 

Century Buildings, Moscow - offices

Two Class B+ office buildings Part of the MirLand Business Center.

· Leasable area: 20,900 sqm

· Completed: Q1 2009

· Leasehold rights of land: 61%/51%

· Occupancy rate: 97%

· Financing: US$14 million financed by Sberbank in February 2011 (principal balance as of 31 December 2013: US$10.8 million) 

Tamiz, Moscow - offices

New class B+ office building Part of the MirLand Business Center.

· Leasable area: 11,700 sqm

· Completed: Q3, 2011

· Leasehold rights of land: 100%

· Occupancy rate: 91%

Vernissage Mall, Yaroslavl - retail

A Western standard single floor shopping centre in Yaroslavl, located at the entrance road to Yaroslavl from Moscow.

· Land area: 12 ha

· Leasable area: 34,100 sqm

· Completed: Q2 2007

· Freehold rights: 50.5%*

· Occupancy rate: 100%

· Financing: US$27 million financed by Gazprom Bank in February 2011 (principal balance as of 31 December 2013: US$22.0 million).

*Purchase of outstanding share pending completion

Triumph Mall, Saratov - retail

The first multi-storey retail and entertainment centre in Saratov. The complex is strategically located near the historical city centre on an important retail avenue in the city.

· Land area: 2.2 ha

· Leasable area: 27,300 sqm

· Completed: Q4 2010

· Freehold rights: 100%

· Occupancy rate: 100%

· Financing: US$95 million financed by Sberbank in June 2013 (principal balance as of 31 December 2013: US$70.5 million) 

Completed Residential Projects:

Western Residence - Phase I, Perkhushkovo, Moscow region - residential complex

Development of 77 townhouses and cottages (out of 163) in the prestigious western outskirts of Moscow, targeting the high end of middle class segment

· Land area (Phase I): 11 ha

· Saleable area (Phase I): 20,400 sqm (excluding sold houses)

· Freehold rights: 100%

· Sales: 30 houses have been sold Completion: Phase I (77 townhouses and cottages) was completed in Q4, 2011.

· Financing: US$25 million was financed by Sberbank in December 2011 (principal balance as of 31 December, 2013: US$5.8 million).

Project under construction:

Triumph Park, St. Petersburg - residential complex

Phased development of a residential neighbourhood which, upon completion, will comprise approximately 9,000 apartments, commercial and public areas with good accessibility to the city and its airport. The commercial areas will include offices and a commercial centre with underground parking. The public facilities will include kindergartens, a school and parks.

· Land area: 41 ha

· Saleable area: 560, 000 sqm

· Leasable area: 117,775 sqm

· Planned completion of total project: Q4 2020

· Freehold rights: 100%

· Marketing:

- Phase I, which consists of approximately 26,200 sqm representing 510 apartments.

- Sales and construction of Phase II, which consists of approximately 32,600 sqm representing 630 apartments, was launched in September 2012.

- Sales and construction of Phase III, which consists of approximately 62,500 sqm representing1,346 apartments, was launched in September 2013.

- Launch of sales and construction of Phase IV, which will consist approximately 65,000 sqm representing1,350 apartments, is planned for Q4 2013

· Sales:

- Phase I: sold out;

- Phase II: to date, 515 sale contracts have been executed and 7 reserved;

- Phase III: to date, 283 sale contracts have been executed and 20 reserved;

· Financing:

- credit line of US$41 million for Phase I construction was obtained from Sberbank in November 2011 and fully repaid;

- credit line of US$47.5 million for Phase II construction was obtained from Sberbank in September 2012 (principal balance as of 31 December 2012: US$0.1 million)

- credit line of US$96 million for Phase III construction was obtained from Sberbank in September 2013 (principal balance as of 31 December 2012: US$3.9 million)

Projects in Planning:

Big Box Complex, Yaroslavl - retail

Development of a retail complex adjacent to the Vernissage mall in Yaroslavl.

· Land area: 18 ha

· Leasable area: 55,250 sqm

· Planned construction commencement: Q2 2014 (Phase IIa)/ Q2 2015 (Phase IIb)

· Planned completion: Q3 2015 (Phase IIa)/ Q4 2016 (Phase IIb)

· Freehold rights: 50.5%*

*Purchase of outstanding share pending completion

Triumph House, Kazan - retail

Development of home design and improvement centre at favourable location in the city

· Land area: 2.2 ha

· Leasable area: 16,783 sqm

· Planned construction commencement: Q2 2014

· Planned completion: Q1 2016

· Freehold rights: 100%

Saratov - logistics

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

· Land area: 26 ha

· Leasable area: 104,000 sqm

· Planned construction commencement: Q2 2015

· Planned completion: Q4 2017

· Freehold rights: 100%

Novosibirsk - logistics

Phased development of a logistics centre in Novosibirsk, closely located to the federal highways and railways.

· Land area: 40.6 ha

· Leasable area: 180,000 sqm

· Leasehold rights: 100%

· Planned construction commencement: Q4 2015

· Planned completion: Q3 2018

Western Residence - Phase II, Perkhushkovo, Moscow region - residential

Development of 86 townhouses and cottages (out of 163) in the prestigious western outskirts of Moscow.

· Land area: 11.5 ha (Phase II)

· Saleable area: 36,477 sqm

· Freehold rights: 100%

· Planned construction commencement: Q1 2015

· Planned completion: Q3 2016

Outlook

We strongly believe in the quality of our portfolio projects and that our prudent and selective approach to their management and development will lead to an increase in long term value for our shareholders.

I would like to thank our shareholders for their on-going support of the Company, MirLand's management team for its dedication, and the Company's employees, who are responsible for the day-to-day activities. I am confident that this strong team will continue working through the challenging, fast-paced market to realize MirLand's long term vision.

Roman Rozental

Chief Executive Officer

12 March 2014

FINANCIAL REVIEW

Revenues for 2013 were US$103.8 million and net profit was US$6.2 million. Total Assets at 31 December 2013 amounted to US$853.1 million and Equity amounted to US$331.7 million. The Company's adjusted net asset value was US$556.7 million. The Company's real estate assets were valued on 31 December 2013 at US$977.2 million (for 100% rights from freehold/leasehold) by Cushman & Wakefield, the external appraiser, of which MirLand's share is US$880.7 million. 

Accounting Policy

The Company's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the requirements of the Cyprus Companies Law, Cap 113.

Income Statement

The Company's revenues consist of rental income from investment properties, income from sales of residential units and fees from managing investment properties. Rental income and fees from investment properties increased to US$47.8 million from US$33.9 million, which is a 41% increase. This growth is attributed to increased occupancy in all yielding assets that reached an average figure of approximately 96% and to management constant effort to decrease operational expenses of the Company. The Company's recognised income of US$56.1 million from sale of inventory was due to the handover of residential units in Triumph Park Phase I and houses in the Western Residence project, to buyers. The gross profit attributed to Triumph Park Phase I sales reached US$11.4 million, representing profitability margin of approximately 22%.

The cost of maintenance and management of the Company increased from US$14.9 million in 2012 to US$17.4 million in 2013, which was largely attributed to the full consolidation of the Century projected (presented on equity basis in 2012). Like for like assets recorded a slight decrease of approximately 2% due to efficiency measures performed by the management, despite an increase in the size of let areas. 

In accordance with IAS 40, the Company has revalued its investment properties and investment properties under construction for the financial period ending 31 December 2013 and has recognized the resulting movement in valuation through its income statement as fair value adjustments of investment properties and investment properties under construction. The profit of US$45.1 million was based on net effect of the valuations of the Company's investment properties and investment properties under construction prepared by an independent appraiser, Cushman & Wakefield, in accordance with International Valuation Standards and was mainly driven by increase in value of yielding assets and devaluation of the Russian Rouble against the US Dollar.

The Company's general administrative expenses for the period were US$13.3 million in comparison to US$14.6 million in 2012. The decrease of 8.9% is mainly attributed to a reduction in professional and other services purchased by the Company.

Marketing expenses for the period were US$5.4 million in comparison to US$2.1 million in 2012, largely attributed to the recognition of the brokerage fees relating to Phase I of the Triumph Park project.

Net financing costs for the period amounted to US$31.4 million compared to US$23.6 million in 2012. The increase is explained by additional financing raised by the Company to expand its development activities and deliver further growth through its activities.

Tax expense in 2013 amounted to US$1.1 million, similar to 2012. The tax expense recorded in 2013 was mainly attributed to the decrease of a deferred tax asset in the Company's balance sheet, due to recognition of profits attributed mainly to the Triumph park project in St. Petersburg.

MirLand is a resident of Cyprus for tax purposes and is subject to a 12.5% corporate tax rate. MirLand's subsidiaries in Russia are subject to a 20% tax rate. Additional details are covered in note 16 to the financial statements.

The net profit for 2013 amounted to US$6.2 million in comparison to loss of US$42.3 million in 2012. The profit is mainly attributed to the recognition of profit from Phase I phase of the Triumph Park project and increased net operating income from the yielding assets.

Balance Sheet

Total assets as at 31 December 2013 amounted to US$853.1 million in comparison to US$743.7 million in 2012, an increase of 14.7%. The main reasons for the overall increase were the increase in cash and cash equivalents balance, increase in a fair value of investment properties, and continuing development of the Company's residential projects which were financed through bank financing on the project level and apartment sales.

The Company's real estate portfolio amounted to US$767.3 million at the year end, and comprised 90% of the total assets, in comparison to US$695.0 million as at 31 December 2012 which comprised 93% of the total balance sheet, the increase of 10.4% coming mainly from increase of fair value of investment properties and investments made during the year.

Equity and Liabilities

Equity as at 31 December 2013 increased to US$331.7 million from US$317.3 million as at 31 December 2012. The increase in equity from 2012 ascribed mainly to the full consolidation of the Century project and the net income recorded during the year, which was offset partially by the devaluation of the Russian Rouble versus the US Dollar which led to decreased foreign currency translation reserve. MirLand's equity comprises 39% of its total assets.

Net financial liabilities as at 31 December 2013 amounted to approximately 357.7 million compared to US$304.2 million as at 31 December 2012.

The Company's series A to D bonds are rated ilBBB+/stable by Ma'alot Standard & Poor's. The Company's series A, B, D and E bonds are rated ilBaa1/ stable by Midrug (Moody's Israel affiliate rating agency), following a credit rating upgrade in 2013.

During 2013, further emphasis was made on diversifying the company's funding sources by obtaining bank financing on the project level. In 2013, the following new bank loans were obtained:

*Refinance of remaining balance of existing loan with lower interest and debt service.

** Maximal availability.

Net Asset Value ("NAV")

The Company's real estate assets were valued by an external independent appraiser, Cushman & Wakefield, in accordance with International Valuation Standards on 31 December 2013 at US$977.2 million (for 100% rights from freehold/leasehold), of which MirLand's share is US$880.7 million. The increase in value mainly attributed to the improvement in operational results of MirLand's yielding assets, significant progress made in sales, construction and financing of the Triumph Park residential project in St. Petersburg and investments made during 2013.

Overview of Portfolio Market Values as at 31 December 2013

The full Cushman & Wakefield valuation is available on the Company's website, www.mirland-development.com.

Based on the Cushman & Wakefield valuation as at December 2013, the Company's Adjusted NAV increased to US$556.7 million (31 December 2012: US$544.8 million), an increase of 2.2%. As a result, the NAV per share as at 31 December 2012 was US$5.4 in comparison to US$5.3 as at 31 December 2012.

Cash Flow

During 2013, the Company used US$50 million for investment in real estate properties (including change in buildings for sale) in comparison to US$41.2 million in 2012. Cash flow used in operating activities amounted to US$16.8 million. Cash flow provided by financing activities amounted to US$64.3 million.

Financial Strategy

In 2013, MirLand's activities were primarily financed by project bank loans and by revenues from yielding and residential projects. The Company's policy is to limit its leverage to 66% of the gross value of its assets, including all development, trading and investment properties. The Company continues to have modest net leverage at 41.9% of its assets.

Typically, residential projects are constructed in phases, allowing the use of capital from pre-sales to finance on-going development phases. However, the Company obtained construction loan facilities from Sberbank for the 1-3 phases of its flagship project, the Triumph Park in St. Petersburg, respectively.

Wherever possible, the Company seeks to acquire finance on a non-recourse basis to minimise risk. The Company is negotiating with several banks for financing some of its other pipeline projects.

Market Risks

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

Foreign Currency Risks: The Company's functional currency across its operating subsidiaries is the Rouble, whereas the Company's reporting currency is the US Dollar. The majority of the Company's revenues, costs and capital expenditures are either priced, incurred, payable or measured in US Dollar. Although most transactions are settled in Roubles, the price for real estate property is tightly linked to the US Dollar. However, the current trend in Russia is to move toward Rouble linked transactions and therefore, the Company will consider in the future hedging its transactions for currency risks. 

Interest Rate Risks: Whilst the Company does not currently have any significant interest bearing assets, changes in interest rates could affect the cost of current and future financing.

Credit Risks: The Company performs ongoing credit evaluations of its tenants, purchasers and contractors and its financial statements include specific allowances for doubtful accounts. The Company also seeks to mitigate the risk of non-payment in structuring its contractual arrangements with such parties.

Regulatory Risks: On 11 December 2013, the Law on Promotion of Competition and Reduction of Concentration (2013) (the "Concentration Law" or the "Law") was published in Israel where the Company's bonds are listed. The Law deals with a number of issues, including restrictions on control of reporting companies within pyramid holding structures and a ban on control by a second layer company of a company in a different layer, all as more thoroughly described in Section C of the Concentration Law. A company which, upon the date of publication of the Concentration Law, was a second layer company, and so long as it remains as such, is entitled to continue to control a company of a different layer for up to six years from the date of publication of the Concentration Law, if such a company controlled the "different layer" company prior to the publication (the "Intermediate Period"). During the Intermediate Period, special corporate governance rules shall apply, as set out in the Concentration Law, and which may be applicable to the Company, including appointment of a majority of independent directors.

The Company is evaluating the implications of the Concentration Law and whether it will apply to it. The Company is in discussions with the Ministry of Justice and the Israeli Securities Authority to clarify and negotiate certain exemptions if it becomes clear that the Concentration Law will apply to the Company.

In case the Law applies to the Company, it intends, in conjunction with its group of controlling companies, to take all necessary action in order to comply with the Concentration Law, including regarding the instructions provided for the Intermediate Period, as mentioned above.

Yevgeny Steklov

Chief Financial Officer

12 March 2014

Certain information contained in this Announcement constitutes "forward-looking statements" which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "target", "project", "estimate", "intend", "continue" or "believe", or the negatives therefore or other variations thereof or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Company may differ materially from those reflected or contemplated in such forward-looking statements.

*) Restated. See Note 2z.

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

*) Restated. See Note 2z.

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

*) Restated. See Note 2z.

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

*) Restated. See Note 2z.

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

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

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

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