GROUP CEO’S REVIEW
Looking back on the real estate market of the previous quarter, the only word to describe it is “expectant”. Buyers seem to expect for sales prices of real estate to drop and sellers for the increase of interest rates to settle down. Therefore, people are actually expecting an adjustment to the new reality.
Arco Tarc is continuing construction in Kodulahe Kvartal as planned. We have prepared for a sales period in the second half of 2023 where we foresee an increased demand for apartments with optimal utility costs and stabilizing interest rates. This is supported by an overall drop in construction activities in 2022 and 2023. At the same time, the composition of the Arco Vara land bank and projects in development are clearly advantageous to a further increase of operating volumes.
Construction has begun in the Bulgarian residential development Botanica Lozen Residences, currently undergoing foundation and digging works. A booking contract has been concluded on one building out of the 16 homes to be built in the first stage. It should be noted that Bulgaria is not tied to the increase of base interest rates of the European Central Bank and the local base interest rate has increased to 1.3%, maintaining the spark in the real estate sales market of the country.
From the results of the previous quarter, a loss of nearly 800 thousand euros stands out, a significant part of which is related to the resolution of the board to sell the building at Madrid BLVD after 10 years of efforts to generate stable rental income. The decision is connected to Arco Vara’s expectation to generate 20% ROI per year, which the company has not managed by leasing commercial real estate. The released 4.1 million EUR will be redirected to development, i.e., the single loss of the sale of the building does not outweigh the capital being tied up any further.
When looking at financial indicators, the high level of liquidity and the low increase of loan interest can be considered a positive sign, facilitated by earlier loan contracts with a fixed interest rate which will keep the interest expenses of Arco Vara under control in future periods as well.
In summary, the objectives of the company have remained the same and we will continue to strengthen the foundation of the company to be able to sell at least 200 homes per year to customers. The primary goal for 2023 is to increase the number of units under development, but we must focus more on innovation in existing developments to create Arco Vara on the next level.
KEY PERFORMANCE INDICATORS
In Q4 2022, the group’s revenue was 327 thousand euros, which is 1% less than the revenue of 330 thousand euros in Q4 2021. In 12 months 2022, the group’s revenue was 13,494 thousand euros, which is 16% more than the revenue of 11,613 thousand euros in 12 months 2021.
In Q4 2022, the group’s operating loss (=EBIT) was 723 thousand euros and net loss 811 thousand euros (in 12 months 2022: operating profit 1,062 thousand euros and net profit of 695 thousand euros). In Q4 2021, the group had operating loss of 155 thousand euros and net loss of 354 thousand euros. In 12 months 2021, the group made operating profit of 2,569 thousand euros and net profit of 2,071 thousand euros.
In Q4 2022, 12 parking places were sold in projects developed by the group (in 12 months 2022: 72 apartments and a land plot in Latvia). In Q4 2021, also only garages were sold (in addition, 63 apartments and 2 commercial spaces in 12 months).
In the 12 months of 2022, the group’s debt burden (net loans) increased by 5,341 thousand euros up to the level of 14,662 thousand euros as of 31 December 2022. As of 31 December 2022, the weighted average annual interest rate of interest-bearing liabilities was 5.8%. This is an increase of 0.6 percentage points compared to 31 December 2021.
OPERATING REPORT
The revenue of the group totalled 327 thousand euros in Q4 2022 (in Q4 2021: 330 thousand euros,) and 13,494 thousand euros in 12 months 2022 (in 12 months 2021: 11,613 thousand euros), including revenue from the sale of properties in the group’s own development projects in the amount of 89 thousand euros in Q4 and 12,426 thousand euros in 12 months 2022 (2021: 37 thousand euros in Q4 and 10,478 thousand euros in 12 months).
Most of the other revenue of the group consisted of rental and property management services income from commercial and office premises in Madrid Blvd building in Sofia, amounting to 161 thousand euros in Q4 2022 and 756 thousand euros in 12 months (2021: 202 thousand euros in Q4 and 810 thousand euros in 12 months). By the time of publishing the present report, 2 offices remain vacant, but all commercial spaces, together with parking places, were rented out. 9% of the office is in renovation.
In 2022, the construction company Arco Tarc OÜ was established, which laid the foundation for a new business segment. The construction service is offered intra-group with a fixed profit margin of 4%.
The construction of the IV-V stage buildings in Kodulahe ended in 2022. Two residential buildings with 36 apartments were completed at Pagi 3 and Pagi 5. The income from the sale of buildings is reflected in the 2022 report, there are no unsold apartments.
The construction and sale of the Stage VI of Kodulahe project called Rannakalda at Lammi 8 started in February 2022 by Arco Vara’s own construction company Arco Tarc OÜ. The construction includes a pavilion, 4 commercial areas and 108 apartments (in three separate buildings), out of which many have sea view. One of the apartment buildings will be ready at the end of 2023, the ohter houses at the beginning of 2024. As at the date of publishing the annual report, 42 units out of the 113 have been presold.
A subsidiary of Arco Vara, Aktsiaselts Kolde, in 2021 signed an agreement for land acquisition beside Lake Harku, address Paldiski road 124b, Tallinn. More than 35,000 m2 of residential and commercial real estate (GBA) is planned for development. The project is called Arcojärve. The expected development period is 6 years with the start of construction planned for 2024.
In the Pirita Kuldlehe project, it is planned is to build an exclusive and high-quality cluster house with 5 homes in 2023. The construction of roads and communications has been completed. The house will be completed within a year. The sale of the project has started.
The Botanica Lozen project foresees construction of 54 homes (houses) in three stages. The construction and sale of the first 16 buildings has started. Minimum construction period for the whole project is 2 years.
As of 31 December 2022 and the date of this report, 3 Marsili residential plots remained unsold in Latvia.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| In thousands of euros | 12m 2022 | 12m 2021 | Q4 2022 | Q4 2021 |
| Revenue from sale of own real estate | 12,426 | 10,478 | 89 | 37 |
| Revenue from rendering of services | 1,068 | 1,135 | 238 | 293 |
| Total revenue | 13,494 | 11,613 | 327 | 330 |
| Cost of sales | -10,913 | -8,578 | -248 | -123 |
| Gross profit | 2,581 | 3,035 | 79 | 207 |
| Other income | 212 | 258 | 3 | -14 |
| Marketing and distribution expenses | -249 | -200 | -96 | -91 |
| Administrative expenses | -1,118 | -1,106 | -354 | -475 |
| Other expenses | -14 | -76 | -5 | -18 |
| Gain/loss on revaluation of investment property | -350 | 658 | -350 | 236 |
| Operating profit/loss | 1,062 | 2,569 | -723 | -155 |
| Financial costs | -367 | -390 | -88 | -91 |
| Profit/loss before tax | 695 | 2,179 | -811 | -246 |
| Income tax | 0 | -108 | 0 | -108 |
| Net profit/loss for the period | 695 | 2,071 | -811 | -354 |
| Total comprehensive income/ loss for the period |
695 | 2,071 | -811 | -354 |
| Earnings per share (in euros) | ||||
| – basic | 0.07 | 0.22 | -0.08 | -0.03 |
| – diluted | 0.07 | 0.22 | -0.08 | -0.03 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
| In thousands of euros | 31 December 2022 | 31 December 2021 |
| Cash and cash equivalents | 3,427 | 1,863 |
| Receivables and prepayments | 4,387 | 3,701 |
| Inventories | 22,511 | 15,761 |
| Investment property for sale | 9,050 | 0 |
| Total current assets | 39,375 | 21,325 |
| Receivables and prepayments | 18 | 5 |
| Investment property | 82 | 9,943 |
| Property, plant and equipment | 284 | 154 |
| Intangible assets | 46 | 87 |
| Total non-current assets | 430 | 10,189 |
| TOTAL ASSETS | 39,805 | 31,514 |
| Loans and borrowings | 5,255 | 6,043 |
| Payables and deferred income | 3,681 | 2,368 |
| Total current liabilities | 8,936 | 8,411 |
| Loans and borrowings | 12,834 | 5,141 |
| Total non-current liabilities | 12,834 | 5,141 |
| TOTAL LIABILITIES | 21,770 | 13,552 |
| Share capital | 7,272 | 7,272 |
| Share premium | 3,835 | 3,835 |
| Statutory capital reserve | 2,011 | 2,011 |
| Retained earnings | 4,917 | 4,844 |
| Total equity attributable to owners of the parent | 18,035 | 17,962 |
| TOTAL EQUITY | 18,035 | 17,962 |
| TOTAL LIABILITIES AND EQUITY | 39,805 | 31,514 |
