Half Yearly Report

19 August 2015

MIRLAND DEVELOPMENT CORPORATION PLC

("MirLand" or the "Company")

UNAUDITED INTERIM CONSOLIDATED REPORT FOR THE

SIX MONTHS ENDED 30 June 2015

INCREASED REVENUES AND RESILIENT PERFORMANCE,

DEPSITE TOUGH MARKET CONDITIONS

MirLand, one of the leading international residential and commercial property developers in Russia, announces its results for the six months ended 30 June 2015.

Financial Highlights:

· Total revenues up 43% to US$66.2 million (30 June 2014: US$46.3 million) due to an increase in income from the sale of residential units; 

· Net operating income ("NOI") from the Company's share of the investment portfolio down to US$12.4 million (30 June 2014: US$19.9 million), mainly due to depreciation in the Russian Rouble against the US Dollar and due to movement in the Russian real estate market;

· Gross profit of US$12.8 million (30 June 2014: US$21 million);

· EBITDA of US$7.2 million (30 June 2014: US$12 million);

· Loss of US$66.2 million (30 June 2014: net income of US$0.3 million) due to the on-going impact of adverse conditions in the Russian economy, which resulted in the negative fair value adjustment of the Company's share of the investment portfolio of approximately US$50.4 million following a decrease in projected NOI. In addition, the Company recorded a net foreign exchange loss of US$2.9 million. There was also a negative fair value adjustment of the Company's share of the investment portfolio of US$10.3 million following depreciation of the Russian Rouble against the US Dollar of approximately 1.3%, resulting in nominal depreciation of commercial assets at the same rate;

· Total assets amounted to US$694.9 million, of which 89% are property and land assets (31 December 2014: US$756.6 million); 

· Total equity of US$79.9 million (31 December 2014: US$141.4 million), equating to 11.7% of total assets;

· Net leverage stands at 71.1% of total assets (31 December 2014: 57%);

· The Company is continuing its discussions with the trustees of the Series A-F bondholders to agree a restructuring of its debt and will update the market in due course.

Operational Highlights

Residential:

Triumph Park, St. Petersburg

Sales rates continue to remain high with prices in Russian Rouble of later phases increasing ahead of inflation:

· Phase II: Handover of final apartments during the third quarter of 2015.

· Phase III: Sales momentum continuing with an additional 78 sales since 1 January 2015. In total, 922 apartments out of 1,346 have been pre-sold, totalling circa 69% of the scheme and representing sales of approximately US$69.9 million;

· Phase IV: Construction of 1,244 units began in Q3 2014, followed by the commencement of sales in Q1 2015. 267 apartments were pre-sold off plan during the initial six months with sales totalling approximately 22% of the scheme or US$19.8 million.

Western Residence, Perkhushkovo, Moscow

· Further strong progress, with sales of a further nine houses at our Western Residence development in Perkhushkovo, Moscow, have completed since 1 January 2015, taking the total number of units sold to 49 of the 77 houses in the scheme.

Retail:

· Satisfactory performance achieved despite pressures on rents and occupancy rates during the first six months, with half year NOI of US$7.4 million from the Vernissage Mall and Triumph Mall, compared to US$11.7 million last year;

· Occupancy slightly decreased to approximately 90%;

· An agreement to sell land for the construction of a 15,000 sqm extension of the Vernissage Mall, which will house an international DIY retailer, was signed during the period. The store is expected to be open and trading within a year and the Board expects the introduction of the retailer to increase the attractiveness of the Mall as a retail destination.

Offices:

· Occupancy rates slightly decreased at the MirLand Business Centre, and stand at 81% - in line with the market trend. NOI has reduced to US$5 million (Company share) in the first half of 2015.

Nigel Wright, Chairman of Mirland, commented:

"In testing market conditions, we have been able to increase revenues and maintain a respectable operational performance. Mirland's resilience has been demonstrated by strong residential sales at Triumph Park in St. Petersburg. The latter phases of the development have achieved higher sales prices, exceeding inflation, and delivered strong profits from the project.

 "As I have stated previously, economic conditions in Russia are beyond our control and there is no denying that our performance has been severely impacted by the devaluation of the Russian Rouble and a consequent devaluation of assets. We are working hard to maximize value by all means within our control and continue to keep a close eye on capital expenditure. We successfully reduced Maintenance and Management Costs together with General and Administrative expenses again during the period.

"Despite the current challenging conditions in the Russian market, we remain confident that the quality of our portfolio will be further demonstrated as the market improves in the long-term."

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MirLand's progress during the first half year of 2015 reflects our core 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.

FINANCIAL REVIEW

Balance Sheet

Our balance sheet remains resilient with total assets as at 30 June 2015 of US$694.9 million (31 December 2014: US$756.6 million). Total equity was US$79.9 million as at 30 June 2015 (31 December 2014: US$141.5 million) and net cash was US$29 million. 

MirLand's assets are externally valued half-yearly on 30 June and 31 December by Cushman & Wakefield. Based on the 30 June 2015 valuation, investment properties and investment properties under construction decreased in value to US$364.2 million as at 30 June 2015 (31 December 2014: US$414.6), mainly due to the depreciation of the Russian Rouble (compared to 31 December, 2014) against the US Dollar and the continuance of the challenging economic environment in the country. In carrying out the valuations, no change was made to the discount and capitalisation rates by Cushman & Wakefield.

Inventories of buildings for sale slightly decreased from US$258.2 million as at 31 December 2014 to US$252.3 million (30 June 2015) mainly due to delivery of apartments from the second phase to the tenants during the first half of 2015. 

Equity and Liabilities

Total equity as at 30 June 2015 was US$79.9 million, including minority rights. This represents a decrease on the US$141.5 million reported at 31 December 2014 and was mainly caused by devaluation of the Russian Rouble against the US Dollar and the negative revaluation of the Company's properties. Shareholders' equity comprises 11.7% of total assets.

Net Financial liabilities as at 30 June 2015 were US$466.5 million in comparison to US$430.1 million at 31 December 2014. As at 30 June 2015, net financial liabilities comprised 71.1% of MirLand's total assets.

Income Statement

Total income (income from the sale of inventories, revenues from rent and management fees) increased 43% to US$66.2 million (H1 2014: US$46.3 million) primarily due to an increase in income from the sale of residential units. 

In accordance with IAS 40, the Company has revaluated its investment properties and investment properties under construction for the financial period ending 30 June 2015 and has recognised the resulting movement in valuation through its income statement as fair value adjustments. The fair value negative adjustment during the period amounted to US$60.7 million (H1 2014: US$8.8 million) and was mainly attributed to a decrease in projected NOI, which resulted in the negative fair value adjustment of investment properties of approximately US$50.4. There was also a negative fair value adjustment of investment properties of US$10.3 million following depreciation of the Russian Rouble against the US Dollar of approximately 1.3%, resulting in nominal depreciation of commercial assets at the same rate.

The cost of maintenance and management of the Company's investment portfolio decreased from US$8.4 million in H1 2014 to US$6.9 million in H1 2015. This was due to the additional efficiency measures implemented by the Company, mainly in the office segment and the depreciation of the Russian Rouble against the US Dollar.

The Company's gross profit for the period decreased to US$15.7 million compared to US$21million in the same period in 2014.

General and administrative expenses for the period decreased to US$5.4 million in comparison to US$6.7 million in the same period in 2014, mainly due to efficiency measures implemented by the Company.

Net financing costs for the period amounted to US$16.7 million in comparison to US$16.8 million in the same period of 2014. Foreign exchange differences resulted in a loss of US$2.9 million due to the appreciation of the NIS against the US$ of approximately 3.1%, compared to US$5.8 million in H1 2014.

Loss of US$66.8 million was recorded by the Company compared to net profit of US$0.3 million in H1 2014.

Net Asset Value

The Company's adjusted net asset value as at 30 June 2015 decreased 40.6% to US$98 million, compared to US$165 million as at December 2014. As of 30 June 2015, the portfolio was valued at US$532.6 million, of which MirLand's share is US$504.5 million (December 2014: US$589.5 million).

The valuation of each asset in MirLand's real estate portfolio as at 30 June 2015 is set out in the following table:

The full valuation report is published on the Company's website (www.mirland-development.com).

We strongly believe in the quality of the assets owned by the Company and that the portfolio will deliver an attractive yield to our investors over the long term as the market continues to improve. 

Cash flow

FINANCING

The challenging economic environment has continued to have a substantial impact on the valuation of the Company's real estate portfolio. This saw the value marked down by approximately 36% during 2014 and an additional 12% during the first half of 2015, resulting in net leverage increasing further to 71.1% of total assets as at 30 June 2015 from 56.9% as at 31 December 2014. Total net borrowings amounted to US$466.5 million (31 December 2014: US$430.1 million).

As reported at the time of the Full Year results in March 2015, the Company is in negotiation with the trustees of the Series A-F bondholders to agree a restructuring of its debt which addresses the challenges posed by the current instability in the Russian economy for the benefit of all the Company's creditors and shareholders.

Discussions are continuing and, during this period, the Company has agreed not to undertake certain transactions which would involve incurring any material obligations without giving the Trustees the agreed prior notice (the "Interim Period").

Furthermore, the Company's controlling shareholders, Jerusalem Economy Ltd., Industrial Buildings Corporation Ltd. and Darban Investments Ltd., as well as Dunchoille Holdings Ltd. (a subsidiary wholly owned by the Company), have undertaken that, during the Interim Period, no disposal will be made of any of the Company's debentures held by them, unless they give the Trustees prior written notice specifying the particulars of the transaction.

The Company will update the market further on this in due course.

OPERATIONAL UPDATE

Good progress continues to be achieved in the pre-sale, build and delivery of Triumph Park in St. Petersburg, the Company's BREEAM certified sustainable residential project. Following the successful conclusion of Phase II with all flats sold, and handed over to the buyers during the third quarter of 2015. Sales have continued to be strong in Phase III of the scheme, with 922 (69% of the scheme) apartments now pre-sold. The Company is continuing to achieve sale prices in Russian Rouble in these later phases ahead of the rate of inflation, underpinning the strong levels of profitability for the project.

The construction of Phase IV of the project, representing a further 1,244 units, commenced in Q3 2014, and 267 units were pre-sold during the first six months of sales.

The Western Residence residential development at Perkhushkovo, Moscow, has also maintained momentum with nine further houses sold since the beginning of 2015. This now takes the number sold to 49 of a total of 77 houses in the scheme.

Occupancy at our Vernissage Mall and Triumph Mall assets slightly decreased to approximately 90%, although footfall remained high at both.

In April, 2015, a sub-subsidiary of the Company (Global 1 LLC) ("Sub-subsidiary") which holds the rights of the Yaroslavl Project (Vernissage Mall Project) contracted into a series of agreements that obligate the Sub-subsidiary to sell an area of land of about 20,800 square metres to an International chain that is involved in the "Do-It-Yourself industry" ("The Chain") for a consideration of approximately 400 Million Roubles, including VAT (approximately US Dollar 7.7 million). The chain has taken upon itself the construction obligations of the shop (Big Box) on the land through an undertaking to open the shop on a date no later than 30 June 2016. Additionally, the sub-subsidiary will lease to the chain additional land of about 6,070 square metres for a period of 49 years and will allow the chain access to other areas of the land for the purpose of building the shop. The sub-subsidiary will be responsible for removing all encumbrances and liens on the land before the rights are transferred to the chain, and similarly to establish the necessary infrastructure for running the shop.

After the date of the balance sheet, in July 2015, an approval for its sale was received from the funding bank, which has a pledge on the real estate. The Sub-subsidiary agreed to designate 60% of the total consideration for early repayment of the loan principal received from the funding bank.

Occupancy at the MirLand Business Centre remains in line with market conditions at approximately 81% of the total rentable area, which is in line with the market average.

On account of the challenging economic environment, the Company has been providing certain discounts and limitation agreements on the exchange rate to its retail and office tenants, which led to a substantial decrease in its NOI in the first half of 2015.

MARKET UPDATE

Russia's economy contracted by 4.2% in 2Q15 compared with 2Q14, the largest drop in six years, since the financial crisis in 2009. The annual forecast is for a fall by around 2.8% in 2015, and to grow less than 1% in 2016 (Russian Ministry of Economic Development).

A spike in consumer price inflation, which has peaked at around 17%, resulted in a sharp fall in real wages, weighing on private consumption. The June 2015 inflation rate was 15.3% on an annual basis.

The currency fluctuated between 50-60 Russian Rouble to US Dollar from the beginning of the year and was at 55.52 on 30 June 2015. As of the date of publication of the announcement the rate increased to 65.5.

Russia's Urals oil brand sold for an average of US$56.99 per barrel between January and June, down 47% from an average of US$107.28 per barrel during the same period last year (Russian Ministry of Finance).

The Central Bank interest rate in Russia averaged 6.66% from 2003 to 2015, reaching a record high of 17% in December 2014, and has declined gradually since to 11% on 31 July 2015. It is the fifth consecutive cut aimed at boosting growth and is despite a slight increase in the inflation risks.

Net capital outflow fell in 2Q15 to US$20bn, according to estimated balance of payments data published by the Central Bank of Russia, while in 1Q15 it was at US$32.5bn, and the predicted amount for 2015 is currently $90bn.

Foreign Direct Investments in 2Q15 were approximately US$3.5bn, which is a small improvement from the negative figures in 4Q14 which reflected the conflict and the international sanctions on Russia.

The unemployment rate decreased to 5.4% in June 2015 from 5.6% in May 2015. It is the lowest figure since December 2014 and below market expectations.

Real Estate market

Prime yields in 2Q 2015 were 11% for offices, 11% for prime retail, and 13% for warehouses, which are unchanged from the previous quarter.

In total, the volume of investment in 1H15 in commercial real estate was US$1.3bn (US$658mn in offices, US$196 million in retail and US$444 million in warehouses). The volatile global and domestic economic environment means the forecast for 2015 remains US$2.5bn, taking into consideration a pipeline of US$1bn. US$807 million and US$529million were invested by domestic and foreign companies, respectively. The share of foreign companies' investments decreased from 55% in 1Q15 to 40%. As usual, Moscow attracted the majority of investments - US$1.2bn (90%). Only US$110 million (8%) was invested in commercial real estate in St. Petersburg.

Offices

The total volume of investments in the office segment was US$658 million approximately 50% of total investments).

The average rental rates showed minor growth in Q2, reflecting technical consolidation of the rents. Class A rents are now US$645 per sq m and US$281 per sq m for Class B (triple net). In USD equivalent both classes' average rents decreased in 1H15. In Russian Rouble equivalent, the trends are different with growth in Class A and a decline in Class B.

The average vacancy rate has increased to 17.9%: 31.4% in Class A (2015F - 33%), and 14.7% Class B (2015F - 16%). The net absorption is negative and signifies the lack of demand for new offices.

Retail

The first half of 2015 was characterised by a record low volume invested in retail - US$196 million (15% of total investments).

13 new shopping centres with a total GLA of 547,700 sq m were opened in 1H15 (six in Q1 and seven in Q2 (GLA 199,000sqm)) five of which were delivered in Moscow.

In prime Moscow shopping malls the average vacancy rate remained low at 2.2% (1Q15 - 2%). The total Moscow quality retail stock overall vacancy rate is at 8%.

The prime rental rate indicator in the first half of 2015 was unchanged at US$3,200. At the end of 2014 and beginning of 2015 the majority of retailers received the maximum possible temporary discounts, so rental rate growth may start at the end of 2015, at earliest.

In 2Q15 Moscow shopping mall footfall was the lowest since 2011 and 10% lower than the four-year quarterly average.

Residential

The mortgage lending market is decreasing, with approximately 379.1bn Russia Rouble (Approximately US$6.82bn) of mortgages granted between January and May 2015, 40% lower than the same period in 2014.The average lending rate at the beginning of June 2015 was 13.5% (lower than May at 14.06%).

2Q15 delivery of new residential projects to the market in St. Petersburg totalled 373,000 sq m, which is 60% less than in 1Q15. Most of the delivery to the market remains in the mass-market segment (approximately 275,000 sq m). 2Q15 demand amounted to 800,000 sq m, which is similar to the previous quarter.

Industrial

Total investment volume in the segment was US$225 million in 2Q 2015 (US$444 in 1H15).

About 392,000 sq m of industrial space was completed in Moscow at the end of 1H15.

An increase of 19% in demand was observed in 1H15 (compared to 1H14), after a significant decline in market activity at the end of 2014.

1H15 vacancy rate was at 9.7% in Class A, and of 7% in Class B. 90% of the vacant space marketed with Russian Rouble lease rates. The average lease length is less than five years.

Nigel Wright Roman Rozental

Chairman Chief Executive

18 August 2015 18 August 2015

The accompanying notes are an integral part of the interim condensed consolidated financial statements.INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

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

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

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

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

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

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

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

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

NOTE 1:- GENERAL

a. These interim consolidated financial statements have been prepared in a condensed format as of 30 June 2015 and for the six-month period then ended ("interim condensed consolidated financial statements"). These financial statements should be read in connection with the Company's annual financial statements and accompanying notes as of 31 December 2014 and for the year then ended ("annual financial statements").

b. 1. During 2014, mainly in the second half of the year, the Russian economy was subject to sanctions imposed on it by the west and in the last quarter of 2014, the Russian economy experienced a serious deterioration which resulted, inter alia, in the weakening of Russian Ruble in relation to the U.S. dollar by about 79% up to date. In the second half of 2014 and principally in December of that year, due to the decline in oil prices, the aggravation of the sanctions imposed by the West due to Geopolitical instability in the East Ukraine and the devaluation of the Russian Ruble, the Central Bank of Russia raised the interbank interest rate from 5.5% in January 2014 to 17% as of January 2015. International rating agencies (S&P Moody's and Fitch Ratings) gradually lowered Russia's credit rating to BB+/Baa3 with a negative outlook. After the balance sheet date through the date of signing the financial statements, the Ruble dropped another 9% in its value in relation to the U.S dollar. Up to the signing date of this report the Central Bank of Russia lowered gradually the interbank interest to 11%. After the balance sheet date and up to date the Russia Ruble depreciated by approximately 15% against the US Dollar. The continuance of the depreciation could have additional negative affect on the Company equity.

2. On December 18, 2014, the trustees of the holders of the Company's debentures (series A-F) called for a meeting for obtaining reports from the Company's representatives regarding the developments in the Company's business affairs and for discussing and deciding on actions to be taken to protect the rights of the creditors.

On the same date and following the announcement of the trustees of the holders of the Company's debentures, the Company announced that in view of the fluctuations in the Russian markets, the scheduled meeting of the holders of debentures and their appeals to the Company, the Company's Board decided to defer the principal and interest payments to the holders of debentures (series A-B) which were due on December 31, 2014.

In addition on the same date, the rating agencies (S&P Maalot and Midroog) announced the lowering of the Company's rating to ilCC and B1 with negative outlooks, respectively, this among others, following the Company's announcement of deferring the debenture payments of December 2014.

In the meeting of holders of debentures held on December 22, 2014, the Company announced that it requires time until the general situation in Russia and the Company's specific business affairs become clear. In early January 2015, the Company announced the results of the voting of the holders of debentures (series A-F) which resolved to temporarily defer the maturity dates of the principal and interest payments to the holders of debentures (series A-B) to February 1, 2015 (as well as authorizing the trustee to extend this date by an overall 60-day period) subject to depositing $ 11 million in an escrow account in favor of the Company (reflecting the payment that was due in December 2014) and provided that the Company initiate an immediate, consecutive and intensive dialog with the trustees of the debentures (who have been authorized to negotiate with the Company for reaching an arrangement) and the Company will sign a Stand Still letter and subject to the signing of the stand still letter by controlling shareholders of the Company, Jerusalem Economic Corporation Ltd., and Industrial Buildings Ltd., as long as the amount of the deposit is held in trust account, they will not sell the bonds (series A and B) held Biden to a third party.

On January 22, 2015, the Company signed a "standstill commitment" towards the trustees and the holders of the debentures in which it undertook, among others, to the following principles according to the specified in the "standstill commitment": not to make any material payments to its financial creditors in respect of any debt, whether in or outside of Israel beyond the amortization schedule settled with them, but due notice trustees, not to make any payments to the controlling shareholders in the Company, not to dispose of any material assets, not to distribute any dividends only with a prior notice to the trustees and also other commitments as detailed in the "standstill commitment".

On February 10, 2015, the Company's Board decided to announce the deferral of payments to holders of all the series of debentures until negotiations with them are concluded.

On March 30, 2015 the Company published the arrangement principles which were agreed with the trustees and include, inter alia, increase of interest to all the series,

certain liabilities of the parent Companies and issuance of shares and options to the holders of debentures.

During 2015, the trustee of the series A, E and F decided to defer the maturity dates of the principal and interest payments to August 31, 2015.

On February 2, 2015, S&P announced another lowering of the Company's rating to D- with a negative outlook since the Company failed to meet its liabilities to the holders of debentures (series A and B) in the 30-day period following the original maturity date and given its intention to refinance the debt on the all the debenture series.

At the Bondholders' (Series B) meeting held on June 17, 2015, it was decided not authorize the Trustees to postpone the deadlines of the payments dates.

On July 2, 2015 the Tel Aviv Stock Exchange published a notice on the partial redemption of a loan whose payment was not received by the Exchange's clearance system, such that the unpaid balance of debenture (series B) will be listed separately.

During 2015, the trustee of the debentures (series C-D) decided to defer the maturity dates of the interest payments to September 30, 2015.

On July 6, 2015, the Company published the main amendments to be added to the arrangement plan with the holders of debentures in the Company and an immediate report with respect to the filing of a motion with the court of Cyprus, pursuant to the assembling of meetings toward approval of the arrangement between the Company and its debenture holders. On July 14, 2015, the Company notified that the Cypriot court approved the motion of the Company.

The Company continues negotiations with the trustees of the holders of the debentures in order to achieve a comprehensive arrangement.

As a result, the Company classified the outstanding debentures in an amount of $ 174.1 million as current liabilities in its financial statements as of June 30, 2015.

3. In the context of financing agreements with lending banks in Russia, certain financial covenants were determined with which the Company is not in compliance as of June 30, 2015 which include, among others, a certain LTV ratio, minimum occupancy rates and debt coverage and interest ratios. As a result, the Company classified in its financial statements as of June 30, 2015 loans from banks, in which the Company breaches its covenants, in an amount of $ 206.6 million as current liabilities.

4. The Company has a working capital deficiency of approximately $ 369.9 million as of June 30, 2015, a loss of approximately $ 66.2 million, total comprehensive loss of approximate $ 61.8 million for the six months then ended and negative cash flows from operating activities of approximately $ 16.8 million for the six months then ended.

The Company continues to monitor the economic developments in Russia which are external to the Company and beyond its control and is continuing taking steps to minimize its exposure to the situation. In view of all of the aforementioned, there is a material uncertainty which may cast significant doubt as to the Company's ability to continue to operate as a going concern. The financial statements do not include any adjustments to the carrying amounts of assets and liabilities and their classification which might be required if the Company is unable to continue to operate as a going concern.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES 

a. Basis of preparation of the interim financial statements:

The interim condensed consolidated financial statements have been prepared in accordance with the International Financial Reporting Standard IAS 34 ("Interim Financial Reporting").

b. New standards, interpretations and amendments adopted by the Company:

The significant accounting policies and methods of computation followed in the preparation of the interim condensed consolidated financial statements are identical to those followed in the preparation of the latest annual financial statements. 

NOTE 3:- FINANCIAL INSTRUMENTS 

Set out below is a comparison of the carrying amounts and fair values of financial instruments as of June 30, 2015:

The fair value of the bonds is measured based on quoted market prices, according to Level 1 of the fair value hierarchy.

There is no material change in the fair value of bank loans in compare to the value presented in the annual financial statements.

NOTE 4:- SEGMENTS