THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION
IN OR INTO THE RUSSIAN FEDERATION, THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN
17 March 2015
AFI DEVELOPMENT PLC
("AFI DEVELOPMENT" OR "THE COMPANY")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014SOLID OPERATIONAL RESULTS OFFSET BY VALUATION LOSSES
AFI Development, a leading real estate company focused on developing property in Russia, has today announced its preliminary audited financial results for the year ended 31 December 2014.
Financial highlights:
· Despite a severe rouble depreciation against the dollar, rental income and income from hotel operations decreased marginally by 2% year-on-year to US$141.4 million (compared to US$144.5 million for 2013)
- AFIMALL City contribution amounted to US$107.0 million (compared to US$103.9 million for 2013), a 3% increase year-on-year despite a difficult macroeconomic environment
· In 2014 AFI Development incurred a net loss of US$287.3 million, compared to a net profit of US$103.9 in 2013, mainly due to valuation losses of US$220.7 million in Q4 2014;
· Gross profit for 2014 was US$49.9 million, compared to US$76.3 million in 2013 (the 2013 results were largely affected by the completion of a disposal transaction of parking spaces at AFIMALL City to VTB Bank JSC)
· Cash position remains strong at US$93.3 million in cash, cash equivalents and marketable securities as at 31 December 2014, compared to US$203.3 million as at 31 December 2013
· Gross Asset Value reduced to US$2.0 billion as at 31 December 2014 (compared to US$2.4 billion as at 31 December 2013), due to sharp valuation decreases across the portfolio owing to deteriorating macroeconomic conditions
Operational highlights:
· AFIMALL City operations continued to demonstrate positive dynamics with revenues rising 3% year-on-year to US$107.0 million
- NOI was US$83.0 million for the year, representing growth of 20% year-on-year
- Occupancy levels at 85% of total leasable area
· Sales of apartments continue at Odinburg with 594 sale contracts signed (as of 16 March 2015)
Commenting on today's announcement, Lev Leviev, Executive Chairman of AFI Development, said:
"There is no doubt that 2014 has been a challenging year for AFI Development and the Russian market as a whole. Macroeconomic headwinds and difficult geopolitical situation have inevitably affected demand for real estate assets across the country, including our core market of Moscow. Our results reflect the negative adjustments to the valuation of our portfolio caused by macroeconomic trends and the deteriorating risk profile of the country as a whole. Operationally, however, our results remain solid driven by our unwavering commitment to the highest standards of design, construction and quality of customer service. Although we remain confident in the long-term opportunities in our market, we expect operating conditions to remain challenging throughout 2015."
FY 2014 Results Conference Call
AFI Development will hold a conference call for analysts and investors to discuss its full year 2014 results, following their publication.
The details for the conference call are as follows:
Date:
Wednesday, 18 March 2015
Time:
15:00 GMT (18:00 Moscow)
Dial-in Tel:
International:
UK toll free:
US toll-free:
Russia toll-free:
+44 (0) 20 3003 2666
0808 109 0700
1 866 966 5335
8 10 8002 4902044
Please dial in 5/10 minutes prior to the commencement time giving your name, company and stating that you are dialling into the AFI Development conference call quoting the reference AFI.
For further information, please contact:
AFI Development +7 495 796 9988
Ilya KutnovEkaterina Shubina
Citigate Dewe Rogerson, London +44 20 7638 9571
David Westover
Sandra NovakovShelly Chadda
About AFI Development
AFI Development is one of the leading real estate development companies operating in Russia. Established in 2001, AFI Development is a publicly traded subsidiary of Africa Israel Investments Ltd.
AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction and quality of customer service.
AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favourable return.
AFI Development is a leading force in urban regeneration, breathing new life into city squares and neighbourhoods and transforming congested and underdeveloped areas into thriving new communities. The Company's long-term, large-scale regeneration and city infrastructure projects establish the necessary groundwork for the successful launch of commercial and residential properties, providing a strong base for future.
Forward-looking Statements
This document and the documents following may contain certain "forward-looking statements" with respect to the Company's financial condition, results of operations and business, and certain of the Company's plans and objectives with respect to these items.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates." By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.
There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the economies and markets in which the Company operates; changes in the regulatory and competition frameworks in which the Company operates; changes in the markets from which the Company raises finance; the impact of legal or other proceedings against or which affect the Company; and changes in interest and exchange rates.
Any written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Company or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. The Company does not intend to update any forward-looking statements.
Chairman and Executive Director's Joint Statement
The year 2014 was marked by a serious deterioration of macroeconomic conditions in Russia. There were international sanctions against Russian state-controlled and private companies, including major banks. At the same time, the price of Urals crude oil, the main Russian export commodity, has declined more than twofold over the year. The combination of these factors caused significant depreciation of the Russian rouble versus the US dollar, an increase in inflation and a negative GDP growth rate forecast for 2015[1]. Additionally, the Russian Central Bank decided in December 2014 to increase its key lending rate from 10.5% to 17% (reduced to 15% in January 2015 and to 14% in March 2015), causing a sharp rise in rouble borrowing costs to levels unviable for most corporate and private borrowers.
These developments have started to affect the real estate market in Russia and its capital Moscow, which is the key market for AFI Development. Towards the end of 2014, the vacancy rate in class A office buildings increased to 28.4%, while across A and B class office space it reached 16.7%[2]. Whilst growth in vacancy rates in the retail segment was less pronounced (6% by the end of 2014), analysts note a 20% decrease in average shopping centre rents in dollar terms[3]. Following severe rouble depreciation, office and retail tenants started to experience difficulties in paying dollar-denominated rents, causing many market analysts to forecast a "de-dollarisation" trend across the Moscow commercial real estate market.
The main effect of the difficult market environment on our financial results was significant downward revision of portfolio values in the fourth quarter of 2014. The value of our portfolio of properties was reduced from US$2.4 billion at the end of 2013 to US$2.0 billion at the end of 2014. The significant devaluation of the rouble in relation to the dollar during the fourth quarter caused a decrease in net operating income projections. At the same time, the recent downgrades of the Russian Federation sovereign credit rating by Standard & Poor's and Moody's triggered an increase in the risk-free rate and a corresponding increase in the discount rate employed in DCF valuation models.
The difficult current macroeconomic environment has also caused AFI Development to change some of its development plans. For example, we have decided to postpone the development of Kossinskaya as an apparel and fashion wholesale trade centre due to uncertain levels of potential demand. For other projects currently in the active development stage, such as Tverskaya Plaza Ic, we are looking to obtain debt financing at favourable terms and for the market environment to improve before moving forward. At the same time, development continues to plan at our residential project Odinburg, where we are close to completing our first building, whith apartment pre-sales ongoing.
Our key yielding project, AFIMALL City, currently valued at US$1 billion, continued to improve its operational performance during the year. Sustained strong growth in occupancy levels and the ability to attract new, high quality tenants reflect the high popularity achieved by the Mall. With increasing ease of access due to continued improvements in transport links and the overall development of the "Moscow City" district, AFIMALL City's attractiveness is expected to show further growth in the years to come.
We are pleased to report that, despite difficult market conditions, our rental income for 2014 is down by only 2%. This is driven by the strong performance of AFIMALL City. However, mainly as a result of a valuation loss of US$220.7 million in Q4 2014, we incurred a net loss of US$286.4 million for the year.
Looking to 2015, we remain cautious regarding the outlook for our key market segments. Based on negative expectations with respect to economic growth in Russia and continued lack of geopolitical stability, we expect demand for real estate assets across the capital to decline throughout the year. We continue to monitor market trends and to adapt our strategy to ensure our efforts are focused on the most attractive developments, whilst ensuring our yielding assets maintain their solid operational performance.
Valuation
As at 31 December 2014, based on the Cushman & Wakefield LLC ("C&W") independent appraisers'report, the value of AFI Development's portfolio of investment properties stood at US$1.37 billion, while the value of the portfolio of investment property under development stood at US$0.4 billion.
Consequently, the total value of the Company's assets, mainly based on independent valuation as of 31 December 2014, was US$2.0 billion, compared to US$2.4 million as at 31 December 2013.
The main reasons behind the decrease in the portfolio valuation were as follows:
1. Devaluation of the national currency during the year and a difficult macroeconomic situation driven by imposed economic sanctions
2. As a result of the slowdown in the national economy and increase in country risks, capitalisation and discount rates and projection of future cash flows within the portfolio valuation were revised by C&W individually for each project
For additional information, please refer to the "Portfolio Valuation" section in the Management Discussion and Analysis (the "MD&A").
Liquidity
We completed 2014 with a strong liquidity position of approximately US$93.3 million of cash, cash equivalents and marketable securities on our balance sheet and a debt[4] to equity level of 53%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.
Our financing strategy aims to maximise the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning, we aim to refinance the properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.
For additional information, please refer to the "Liquidity" section of the MD&A.
Key developments since financial year end
In January 2015, the Company subsidiary, Krown Investments LLC ("Krown") signed an addendum to the loan facility agreement with VTB Bank OJSC ("the Bank), extending the term of the loan to 26 January 2018. Krown, which owns the Aquamarine III (Ozerkovskaya III) office complex, had an existing loan from the Bank maturing on 26 January 2015, of which US$ 205 million was outstanding. In addition to extending the term of the loan, the new addendum amended the payment schedule and interest rate conditions of the loan agreement and introduced new covenants. The payment schedule anticipates repayments of the principal starting from Q4 2015, while the new covenants include a Debt Service Coverage Ratio of 1.2 applicable from Q4 2015 and a Loan to Value ratio of 65%. In line with the addendum, on 26th January 2015 Krown paid US$10 million to the Bank as partial repayment of the outstanding loan amount, thus reducing the total to US$195 million. About 90% of the principal is to be paid at maturity.
Portfolio Update
AFIMALL City
During 2014, AFIMALL City reported a strong increase in occupancy levels, reaching 85% vs 76% in December 2013. During its three years of full operation AFIMALL has become one of the most popular shopping centres located in central Moscow, with a quality tenant mix and comfortable leisure, dining and entertainment zones.
Many international retailers chose AFIMALL for their first Russian shops. Forever 21, H&M Home, Crate&Barrel Laura Ashley, and Mirko Botticelli all opened their AFIMALL outlets during 2014. Additionally, the "Fizika" fitness chain opened its two-level club at AFIMALL in 2014, attracting additional visitors to the Mall.
Regarding the claim, filed in August 2014 by the Prosecution Office of the Moscow Central District on fire safety issues, AFI Development confirms that the works requested by the State Fire Safety Control Authorities have been completed by the specified deadlines, following which the Prosecution Office withdrew its claim in February 2015.
AQUAMARINE III (OZERKOVSKAYA III)
Following the disposal of Building 1 to diamond miner Alrosa, AFI Development retains title to the remaining three buildings of the complex, which have a combined GBA of 61,772 sq.m. and GLA of 46,247 sq.m. The Company is currently in negotiations with potential buyers and tenants.
HOTELS
AFI Development's hospitality portfolio, which consists of one Moscow city hotel (Aquamarine) and two resorts in the Caucasus mineral waters region (Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk), has produced solid results in 2014, taking into account the difficult macroeconomic environment.
TVERSKAYA PLAZA Ic
Following the registration of a 10-year land lease agreement, the Company has successfully finalised the development concept of this Class A office complex, received the necessary construction permit and completed all pre-construction works. AFI Developments plans to start construction of this project as soon as it has secured debt financing on favourable terms and the market situation improves.
KOSSINSKAYA - EXPOLON
In November 2014, AFI Development's Board of Directors decided to place on hold and reconsider further implementation of the development concept of Kossinskaya as an apparel and fashion wholesale trade centre named "Expolon", in light of the current economic situation in Russia.
ODINBURG
Construction works of Phase 1 ("Korona") of this development are currently underway. The first building within this phase is close to completion, with final facade works taking place. Construction of the second building began in December 2014. Sales of apartments are progressing in line with the market situation. As of the date of publication of this report, 594 contracts for sales of apartments have been signed.
PAVELETSKAYA PHASE II
During 2014, AFI Development finalised the planning stage of the project. The Company intends to start pre-construction works during H2 2015, subject to improvement in the market situation.
BOLSHAYA POCHTOVAYA
AFI Development is currently developing the design of the project and aims to obtain a construction permit during 2015.
BOTANIC GARDEN
In December 2014, AFI Development restored the Botanic Garden project on its balance sheet, following liquidation of former primary investor, Novoe Koltso Moskvy OJSC ("NKM"), as risks related to the bankruptcy of NKM were removed. The Company has completed the planning of the residential complex and received the Moscow construction authorities' approval for the project. In addition, the necessary construction permit was obtained in December 2014.
Market Overview - General Moscow Real Estate
Macroeconomic environment
During the second half of 2014, Russia was faced with difficult market conditions including decreasing oil prices and growing risk perceptions of the country, leading to a 43% depreciation of the rouble against the US dollar during Q4 alone. Economic growth is widely expected to suffer further during 2015.
Towards the end of 2014, a weak rouble put pressure on inflation, which reached 11.4% year-on-year in December 2014. As a result of this anticipated increase in inflation, consumers aggressively purchased goods which allowed retail sales to remain firm in Q4 2014 at 5.3%. However, looking ahead to 2015, this trend is not anticipated to continue and a 4% contraction in retail sales over 2014 levels is expected.
During 2014, the share of foreign investors in Russian real estate decreased to 24%, compared to 45% in 2013, with local investors largely dominating the market. This trend is expected to continue during 2015 with local players having more comfort in the market than others; however, foreign investors could be attracted back to the market given the lower cost of debt financing if risk appetites allow.
[Source: Russian Investment Market, Q4 2014, JLL; Cushman & Wakefield Report, Marketbeat: Russia; Economist Intelligence Unit Report]
Moscow office market
The overall volume of project completions in 2014 increased by 58% to 1.4m sq.m., representing the highest levels in five years, with over 50% meeting Class A requirements, amounting to the highest ever volume on record.
Driven by the considerable volume of new supply as well a decreasing demand, the average vacancy rate for class A and B combined further increased to 16.7% from 13.7% a year earlier, with vacancy rates in Class A buildings growing at a particularly fast rate to 28.4%, from 18.2% in 2013.
Prime rents ranged from USD750-900 per sq.m. per annum, while Class A rents ranged between US$450 and US$650 and Class B+ rents ranged between US$275-450 per sq. m. per annum. The rouble devaluation during Q4 2014 made companies look for alternatives to US dollar denominated rental rates and de-dollarisation of the Moscow office market is expected to be the main trend in 2015 as rents remain under pressure and are expected to be 10-15% lower.
Looking to 2015, it is expected that about 1 million sq.m. of new office space will be supplied, with the Moscow City area accounting for approximately 25% of that figure. That said, many developers have not yet revised construction plans based on current challenges within the market and it is expected that the pipeline could be reduced further.
[Source: Moscow Office Market View Q4 2014, JLL; Marketbeat Russia, Office Snapshot Q4 2014, Cushman & Wakefield]
Moscow Retail Market
14 shopping centres, including Europe's biggest mall, AviaPark, opened in Moscow during the year. It is expected that during 2015, completions will reach 1.9 million sq.m. as shopping centre supply in Moscow increases by 500,000 sq.m., largely due to a significant number of completions that were expected in 2014 being pushed to 2015.
By the end of 2014, average vacancy rates in Moscow's shopping centres had risen to highs of 6% due to the current economic climate. It is expected that rates will continue to rise to approximately 8% during 2015 as a result of lower retailer demand stemming from the weakening purchasing power of consumers.
Shopping centre rents in Moscow decreased by 20% during 2014 with average rents in the range of USD400-1,450 (per sq.m. per annum) and prime rates ranging between USD2,400 and USD4,500 (per sq.m. per annum). Rental rates are expected to continue to face pressure in 2015 as a result of increasing competition between shopping centres and demands for discounts from retailers. That said, desirable shopping centres will remain in demand with rents not anticipated to shrink significantly.
Looking ahead to 2015, retail sales in Russia are expected to contract by 4% as a result of increased cost of imported goods due to self-imposed sanctions and a devalued rouble negatively affecting consumer purchasing power.
[Source: Marketbeat Russia, Retail Snapshot Q4 2014, Cushman & Wakefield; Retail Market Overview Q4-2014- Shopping Centres, JLL]
Moscow and Moscow Region Residential Market
Moscow - During 2014, approximately 3.3 million sq.m. of residential space was delivered in Moscow, including circa 1.6 million sq.m commissioned in "new Moscow" and about the same area commissioned in "old Moscow". The focus of development activity is gradually shifting to "new Moscow" territories.
The analysis of the structure of the multi-storey residential market reveals business class as the most popular segment among developers, accounting for 49.9% of the supply volume during 2014. Comfort class comes second with 33.3% in the total volume. Premium class occupies 14.3% coming third. Economy class proved to be the least popular with only 3.3% of the whole volume of construction.
In 2014 the average weighted price on the primary residential market of "old" Moscow grew by 13.4% in Russian rouble terms as compared to 2013, to 217,910 RUR per sq m (excluding premium class and apartments). Prices in US dollar terms, however, dropped by 34% to 3,870 USD per sq.m. This is explained by the significant Russian rouble depreciation versus the US dollar during the year, which could not be counterbalanced by growth in the price of housing..
Moscow region - During 2014, there were 982 new buildings commissioned in the Moscow region (representing circa 8.255 million sq.m., an increase of 11.5% over 2013)
The average price per sq.m. in the Moscow region amounted to RUR 81 550 (circa US$1,462). By the year end, comfort class apartments reached RUR83 750 per sq.m. (circa US$ 1,475), whilst business class apartments were priced at RUR189 450 per sq.m. (circa US$3,337).The average price per sq.m. in the Odintsovo region was RUR 96,800 (circa US$1,705).
[Source: Report by Blackwood End of 2014, IntermarkSavills, Rosstat]
Board of Directors
The Directors of AFI Development as at the date of this announcement are as set out below:
Mr. Lev Leviev, Executive Chairman of the Board
Mr. Mark Groysman, Executive Director
Mr. Avraham Novogrocki, Non-Executive Director
Mr. Christakis Klerides, Senior Non-Executive Independent Director
Mr. Moshe Amit, Non-Executive Independent Director;
Mr. John Robert Camber Porter, Non-Executive Independent Director
Mr. Panayiotis Demetriou, Non-Executive Independent Director
Lev Leviev
Executive Chairman of the Board
Mark Groysman
Executive Director
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
As at 31 December 2014, the Company's portfolio consisted of 8 investment properties, 7 investment properties under development, 1 trading property under development, 1 inventory of real estate and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2014, was US$2.0 billion[5]. About 68% of the assets book value is attributed to yielding properties.
Revenues for 2014 decreased by 29% year-on-year to US$144.1 million mainly due to the fact that the 2013 revenue was largely influenced by completion of the disposal transaction of 643 parking places to VTB Bank JSC in Q1 2013. AFI Development recorded a 35% year-on-year decrease in gross profit to US$49.9 million due to the same reason. Cash, cash equivalents and marketable securities decreased by 54% to US$93.3 million as at 31 December 2014 due to financing of construction works, performed in 2014, by own capital.
In 2014 AFI Development incurred net loss of US$287.3 million, compared to net profit of US$103.9 in 2013, mainly due to valuation loss of US$220.7 million in Q4 2014
Key Factors Affecting our Financial Results
Our results have been affected, and are expected to be affected in the future, by a variety of factors, including, but not limited to, the following:
Macroeconomic Factors
Our properties and projects are mainly located in Russia. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.
The following table sets out certain macroeconomic information for Russia as of and for the dates indicated:
Year ended 31
December 2014
December 2013
Real Gross Domestic Product growth
0.5%
1.3%
Consumer prices
11.4%
6.5%
Source: The Economist Intelligence Unit. Rosstat
Company Specific Factors
The following factors affected our performance in 2014:
· In the beginning of 2014 the Company started active sales of apartments at Odinburg, which had a positive impact on the cash flows.
· In Q4 2014 the gross value of the Company portfolio of properties decreased from circa US$2.5 billion recorded at end-September 2014 to circa US$2.0 billion at year-end. The Company recorded a net valuation loss on investment properties, investment properties under development and inventory of real estate during Q4 2014 of circa US$210 million before taxes. The equity decreased in Q4 2014 in the amount of circa US$390 million. The decrease in portfolio value and the valuation loss and impairment were caused by negative developments in the macroeconomic environment in Russia, which resulted in several negative factors influencing valuation models across the portfolio of properties.
Key Portfolio Updates
YIELDING ASSETS
AFIMALL City is a major retail scheme located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 283,182[6] sq.m. (including parking), and GLA of nearly 107,000 sq.m., the project has a shopping gallery of nearly 400 shops and an 11-screen movie theatre with a number of additional outstanding leisure facilities. AFIMALL City is one of Europe's largest and most ambitious retail developments in recent years. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience unmatched in any other retail development in Moscow.
During 2014, AFIMALL City reported a strong increase in occupancy level, reaching 85% in December 2014 vs 76% in December 2013. During its three years of full operation AFIMALL has become one of the most popular shopping centres located in central Moscow with a quality tenant mix and comfortable leisure, dining and entertainment zones.
In the course of the year, AFIMALL became the leading Moscow shopping centre, selected by new-to-Russia brands for their first Russian shops. Forever 21, H&M Home, Crate&Barrel Laura Ashley, Mirko Botticelli all opened their AFIMALL outlets during 2014. Additionally, the "Fizika" fitness chain opened its two-level club at AFIMALL in 2014, attracting additional visitors to the Mall.
The new metro station "Delovoy Tsentr" was opened in January 2014, which, similar to "Vistavochnaya" station, provides direct access to AFIMALL. Over the next year, this station is planned to become the main connecting point for a new line which will link the densely populated residential districts Ramenky, Horoshevskiy, Savyolovsky and Maryina Roscha.
By 2017, transport infrastructure in the business district is expected to significantly improve, which will result in better accessibility and higher attractiveness of "Moscow City" amongst corporate tenants and office employees. The development environment of "Moscow City" continues to be a strong driver for the future traffic growth of AFIMALL City. AFIMALL is surrounded by completed office towers and projects under construction. According to CBRE, during 2013-2014 three new building have been completed, including Mercury City, Stalnaya Vershina (ex-Eurasia Tower) and OKO, adding almost 200, 000 sq.m. of space.
Notwithstanding that construction of surrounding buildings is still ongoing, AFIMALL is easy to reach from different directions: from office towers "Federation", "Naberezhnaya Tower" and "Capital City", as well as from Novotel, "Evolution" tower and the neighbouring ExpoCentre. In 2014, the management of AFIMALL launched a new navigation system, which helps visitors quickly and simply find their way to nearby parking or shops.
According to independent appraisers Cushman & Wakefield, the market value of AFIMALL City as of 31 December 2014 was US$1,000 million.
OZERKOVSKAYA III
Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the very heart of the historical Zamoskvorechie district of Moscow. The project consists of three Class A buildings of 46,247 sq.m. of combined lettable space[7] and common underground parking for 446 cars . The project creates very attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics, "Aquamarine III" sets new standards for quality and an aspirational environment among Moscow's commercial developments.
AFI Development is in negotiations with potential buyers and tenants regarding selling or leasing the project either in full or in parts.
According to independent appraisers Cushman & Wakefield, the market value of the remaining buildings of the Complex as of 31 December 2014 was US$300 million.
The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two located in the Caucasus Mineral Waters region.
AQUAMARINE HOTEL
The Aquamarine Hotel is a modern, 4 star hotel located in the heart of Moscow. It is part of the company's mixed-use Aquamarine development, which also houses an A-class office centre Aquamarine III and completed elite residential complex Aquamarine II.
The Hotel provides high level services and offers 159 spacious rooms, a fitness-centre, spa-centre, bar, restaurant, and conference rooms. It is located in the Zamoskvorechie district which is a 20 minute walk from both the Kremlin and the Tretyakov Gallery and a 5 minute walk from the Novokuznetskaya and Tretyakovskaya metro stations. The Hotel has added to the infrastructure of the historical district and is convenient for both business travellers and tourists.
The hotel's performance in 2014 was negatively affected by the slowdown in international business activity in Moscow, more intense competition and rouble depreciation versus the dollar.
The balance sheet value of the project as of 31 December 2014 was US$17.3 million.
PLAZA SPA HOTEL ZHELEZNOVODSK
Plaza Spa Zheleznovodsk is a sanatorium project which was launched in the summer of 2012 and is located in the Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms on 9,526 sq.m. of gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.
During 2014 the hotel demonstrated growing occupancy, which reached an average of 69% for the year. The hotel benefited from the current trend of growing domestic tourism in Russia.
The balance sheet value of the project as of 31 December 2014 was US$12.2 million.
PLAZA SPA KISLOVODSK
The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility was put into operation in 2008 after a full reconstruction and now has a total of 275 rooms spread over 25,000 sq.m.
Today, the Plaza Spa Kislovodsk is a popular spa hotel which has established new standards of quality and hospitality for the entire region. It offers an extensive range of medical services focused on the treatment of cardiac diseases. Diagnostic and treatment equipment is continually updated and the staff regularly attend training sessions for new methods of treatment to aid rehabilitation of patients.
The balance sheet value of the Company share in the project (50%) as of 31 December 2014 was US$14.4 million.
DEVELOPMENT PROJECTS
Tverskaya Plaza Ic
Tverskaya Plaza Ic is a Class A office complex located in the cultural and business quarter of the Tverskoy sub-district. The complex is located within a 4-minute walk of Belorusskaya metro station, which serves as the main transport hub linking the city centre with one of Moscow's main airports - Sheremetievo International Airport. The project has a GBA of 61,810 sq.m. (including underground parking of approximately 467 parking spaces) and an estimated GLA of 37,035 sq.m.
Following the registration of a 10-year land lease agreement, the Company successfully finalised the development concept, received the necessary construction permit and completed all pre-construction works. AFI Developments plans to start construction of this project as soon as it has secured debt financing on favourable terms and the market situation improves.
Based on an independent valuation of the Company's portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Tverskaya Plaza Ic is US$87.7 million.
Tverskaya Plaza IV
Plaza IV is a Class A office complex with supporting ground level retail zones, located at 11, Gruzinky Val. The project has a GBA of 108,000 sq.m. (including underground parking) and an estimated GLA of 61,350 sq.m.
During 2014, the Company progressed with securing the land lease agreement with Moscow authorities.
Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Plaza IV was US$107.1 million.
KOSSINSKAYA
Kossinskaya is mixed-use building totalling 111, 700 sqm with nine aboveground floors and a single underground level. The property was constructed in 2005. In November 2014, AFI Development's Board of Directors decided to place on hold and reconsider further implementation of the development concept of Kossinskaya as apparel and fashion wholesale trade centre "Expolon", in light of the current economic situation in Russia.
Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Kossinskaya is US$ 53.7 million.
In October 2013, AFI Development began construction at "Odinburg", one of the Company's largest residential projects with a total area of over 33 hectares located 11 km west of Moscow in the town Odintsovo.
The development is planned to include multi-functional infrastructure comprising of two schools, two kindergartens, a medical centre and other facilities.
The project involves construction of a multi-storey residential micro district consisting of two phases:
• Phase I - Construction of a 22-section residential building named Korona (Crown) and of the infrastructure for the kindergartens and schools. This will have a total sellable area of 145,059 sq.m. (2,652 apartments);
• Phase II - Construction of 8 residential buildings and of infrastructure for the kindergartens, schools and outdoor multi-level parking. This will have a total sellable area of of 307,931sq.m of 319,775 sq.m. (6,487 apartments). Each phase includes commercial premises on the ground floor that are planned to be sold to end users.
The construction works of Phase 1 ("Korona") are underway. Construction of the first building within this development is near completion, with final facade works taking place. The construction of the second building began in December 2014. Initial sales of apartments are progressing in line with the market situation. As of the date of publication of this report, 594 contracts for sales of apartments have been signed.
The balance sheet value of the project as of 31 December 2014 was US$133.0 million.
PAVELETSKAYA II
Paveletskaya Phase II is planned as a modern residential complex located on the Paveletskaya Embankment close to Moscow City centre. The project is located in the Danilovsky Subdistrict (the south administrative district of Moscow) and can be easily accessed by private or public transport.
Following the decision of the town-planning land committee ("GZK") and the land plot master-plan ("GPZU") GBA of the project is to comprise 151,373 sq.m., which includes 48,180 sq.m of residential area, circa 26,115 sq.m. of commercial area and 1760 units of underground parking.
During the 2014, AFI Development finalised the planning stage of the project. The Company intends to start pre-construction works during H2 2015.
Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Paveletskaya Phase II is US$67.4 million.
Bolshaya Pochtovaya is a mixed-use project with predominantly residential use. It is located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from a developed infrastructure: transport, shops and cultural/leisure amenities as well as a nearby river which significantly enhances the views from the project. It boasts a GBA of 170,350 sq.m. on a land area of 5.65 hectares.
The development plan for the property anticipates construction of 170,350 sq.m. GBA, which includes 56,952 sq.m. of residential area, 34,208 sq.m. of commercial area and 1,771 underground spaces. Currently, the Company is developing the design of the project and plans to receive the construction permit in 2015.
Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Bolshaya Pochtovaya is US$108.3 million.
Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow, approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira, within walking distance from Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 255,025 sq.m. (including "city share"): 107,501 sqm of residential area, 5,149 sqm of commercial premises and 1,334 underground and above ground parking lots.
In December 2014 AFI Development restored the Botanic Garden project on its books, following liquidation of former primary investor, Novoe Koltso Moskvy OJSC ("NKM"), as risks related to the bankruptcy of NKM were removed. The Company has completed the planning of the residential complex, while the project received the approval of the Moscow construction authorities. A construction permit was received in December 2014.
Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Botanic Garden is US$20.1 million.
LAND BANK
In addition to multiple yielding properties and projects under development, AFI Development also has a land bank which consists of projects that are not currently under development.
By retaining full flexibility regarding future development of these projects, the Company remains well placed to benefit from further recovery in the regional real estate markets. Given its strong track record in bringing projects to completion, this represents a significant competitive advantage for AFI Development.
AFI Development's strategy with respect to its land bank is to activate projects only upon securing necessary financing and having full confidence in the demand levels of prospective tenants or buyers.
Key Events Subsequent to 31 December 2014
Following the year-end the following key events occurred:
Disposals and Acquisitions
During 2014, the Company made the following disposal:
In March 2014 AFI Development disposed of its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project for US$1,400 thousand. The disposal followed the decision not to develop the project. The resulting profit on sale amounting to US$61 thousand was recognised in the income statement of Q1 2014.
During 2014, the Company made the following acquisition:
In July 2014 our subsidiary, MTOK JSC, acquired an office building with total area of 720 sq.m. on Sadovaya Samotechnaya street in central Moscow, for a total consideration of RUR 86.75 million (circa US$1.9 million). The building was acquired from Novoe Koltso Moskvy JSC (former "primary investor" in the Botanic Garden Project, "NKM") as part of its bankruptcy proceedings. The purpose of the acquisition was to accelerate the liquidation of NKM.
Presentation of Financial Information
Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), which were in effect at the time of preparing our consolidated financial statements, and the requirements of the Companies Law of Cyprus, Cap. 113. IFRS differs in various material respects from US GAAP and UK GAAP.
Financial policies and practices
Revenue Recognition
The key elements of our revenue recognition policies are as follows:
· Rental income. We recognise rental income from investment properties leased out under operating leases in our statement of comprehensive income on a straight line basis over the term of the lease. Rental income also includes income from hotels operations.
Hotel operation income
Income from hotel operations comprises of accommodation, treatments and other services offered at the hotels operated by the group and sales of food and beverages and are recognised upon offering of the service and the acceptance by the client.
· Sales of trading properties. We recognise revenue from the sale of trading properties in our statement of comprehensive income when the risks and rewards of ownership of the property are transferred to the buyer. When we receive down payments in connection with the sale of trading property that is under construction, we record this figure in the current liabilities on our balance sheet at the time of sale.
Operating expenses
Operating expenses consist mainly of employee wages, social benefits and property operating expenses, including property tax, which are directly attributable to revenues. We recognise as expenses in our statement of comprehensive income the costs of those employees who have provided construction consulting and construction management services with respect to our investment and trading property. We also recognise property operating costs (including outsourced building maintenance), utilities, security and other tenant services related to our properties that generate rental income, as expenses on our statement of comprehensive income.
Administrative expenses
Our administrative expenses comprise primarily of general and administrative expenses such as, audit and consulting, marketing costs, charity, travelling and entertainment, office equipment as well as depreciation expenses related to our office use motor vehicles, bad debt provisions and other provisions.
Profit on disposal of investment in subsidiaries
We recognise profit or loss from the sale of interests in our subsidiaries when the risks and rewards of ownership are transferred to the buyer in the transaction.
Revaluation of investment property
An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and categories of properties being valued, values the Company's investment property portfolio every six months. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation in a transaction between a willing buyer and a willing seller after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The difference between revalued fair value of investment property and its book value is recognised as gain or loss in the statement of comprehensive income.
Operating profit before net finance costs
Operating profit before net finance costs is calculated by adding revenue, other income, profit on disposal of investment in subsidiaries and valuation gains on investment property, and subtracting operating expenses, administrative expenses and other expenses.
Finance income
Our finance income comprises net foreign exchange gain, if any, and interest income. We recognise foreign exchange gains and losses, principally in connection with US Dollar or other foreign currency denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. Our interest income is derived primarily from interest on our bank deposits and interest on loans to our joint ventures.
Finance expenses
Our finance expense comprises net foreign exchange loss, if any, and interest expense on outstanding loans less interest capitalised. We recognise foreign exchange gains and losses principally in connection with US Dollar denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. We capitalise our interest expense with respect to our development projects that are under construction, for which amounts are not reflected as expenses in our statement of comprehensive income. When funds are borrowed specifically for a particular project, we capitalize all actual borrowing costs related to the project less income earned on the temporary investment of such borrowings and when funding for a project is obtained from our general funds, we capitalise only funding costs related to the particular project based on the weighted average of the borrowing costs applicable to our general funds.
Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance expense depending on whether foreign currency movements are in a net gain or net loss position.
Income tax expense
Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 12.5% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%.
Capitalisation of Costs for Properties under Development
We capitalise all costs directly related to the purchase and construction of properties being developed as both investment properties and trading properties, including costs to acquire land rights and premises, design costs, permit costs, costs of general contractors, costs relating to the lease of the underlying land and the majority of our employee costs related to such projects.
In addition, we capitalise financing costs related to development projects only during the period of construction of the projects. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction on each project begins. Since the Company's adoption of IAS 40 from 1 January 2009, upon completion of construction works, property classified as investment property under development (which are those properties that are being constructed or developed for future use to earn rental income or for capital appreciation) is appraised to market value and reclassified as an investment property and any gain or loss on appraisal is recognised in our statement of comprehensive income. Trading properties, which include those projects where we intend to sell the entire project as a whole or in part (this principally includes our residential development projects), are represented on our balance sheet at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale.
Exchange Rates
Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and joint ventures and one Cyprus company is the Russian Rouble. The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange prevailing at the balance sheet date and income and expense items are translated into US Dollars at the average exchange rate for the period. If the volatility of the exchange rates is high for a given year or period the Company uses the average rate for shorter periods i.e. quarters or months for income and expense items. All resulting foreign currency exchange rate differences are recognised directly in our shareholders' equity under the line item "translation reserve." When a foreign operation is sold, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that foreign operation is recognised in our statement of comprehensive income when the gain or loss on disposal of the foreign operation is recognised. The monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies other than Russian Roubles are initially recorded by our subsidiaries at the exchange rate between the Russian Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Russian Roubles at the exchange rate prevailing at each subsequent balance sheet date. We recognise the resulting exchange rate differences between the dates at which such assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign exchange losses and gains in our statement of comprehensive income. In particular, during the period under review, we have recognised foreign exchange rate gains and losses in connection with US Dollar denominated payables and receivables of our Russian subsidiaries.
Recovery of VAT
We pay VAT to the Russian authorities with respect to construction costs and expenses incurred in connection with our projects, which, according to Russian tax law, can be recovered upon completion of construction. Under a revised Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. We have accordingly included recoverable VAT as an asset on our balance sheet, the size of which we expect will slightly decrease as the development of our projects advances and necessary documents will be obtained.
Deferred Taxation
As we continue to advance the development of our projects, we also expect to record higher deferred tax liabilities and assets. Under Russian tax law, we are not allowed to capitalise certain of the costs in relation to the design, construction and financing of projects that we capitalise for the purposes of our consolidated financial statements under IFRS. As a result, our tax bases in the related assets may be lower than our accounting bases for IFRS purposes, which would result in deferred tax liabilities. However, the recognition of such costs as expenses may result in accumulated tax losses for Russian tax purposes that we may be able to carry forward against estimated future profits, resulting in deferred tax assets. We expect these deferred tax liabilities and assets to grow as our major projects reach more advanced stages. However, such tax losses may only be carried forward to offset gains for a ten-year period under Russian tax law and they may only be utilised in the Russian subsidiary/branch in which such tax losses were generated.
Fair Value Calculation
Our future results of operations may be affected by our measurement of the fair value of our investment properties and changes in the fair value of such properties. Upon completion of construction, the projects that we have classified as investment property under development are reassessed at fair value and reclassified as investment property, and any gain or loss as a result of reassessment is recognised in our statement of comprehensive income.
Any change in fair value of the investment property under development is thereafter recognised as a gain or loss in the statement of comprehensive income. Accordingly, fair value measurements of investment properties under development may significantly affect results of operations even if the Company does not dispose of such assets.
Results of Operations
Description of Statement of comprehensive income Line Items
Summary of statement of comprehensive income for 2014 and 2013
US$ million
For the year ended 31 December 2014
For the year ended 31 December 2013
Change 2014 / 2013
Revenue
Construction consulting/management services
0.2
-
Rental income
141.4
144.6
(3.1)
(2.2)%
Sale of residential
2.4
57.5
(55.1)
(95.8)%
144.1
202.3
(58.2)
(28.8)%
Expenses
Other income
3.5
6.4
(2.9)
(45.1)%
(62.5)
(76.5)
14.0
18.3%
(22.3)
(16.9)
(5.4)
(31.9)%
including Bad debt provisions and write-offs
(4.6)
0.9
(5.5)
(593.5)%
Cost of sales of residential
(1.6)
(32.6)
31.0
95.0%
Other expenses
(6.8)
(1.3)
(23.8)%
(89.7)
(125.1)
35.4
28.3%
Share of the after tax (loss)/profit of joint ventures
(4.5)
(0.8)
(3.7)
(457.6)%
Gross profit
49.9
76.3
(26.4)
(34.6)%
Profit on disposal of investments in subsidiaries
0.1
32.3
(32.2)
(99.6)%
Profit on disposal of investment property
27.8
(27.8)
Valuation gain/(loss) on properties
(85.9)
106.2
(192.1)
(180.8)%
Impairment loss on inventory of real estate
(8.9)
(2.2)
(6.7)
(306.7)%
Results from operating activities
(44.7)
240.5
(285.2)
(118.6)%
7.0
21.0
(13.9)
(66.5)%
Finance expense
(60.8)
(66.9)
6.1
9.1%
FX Gain/( Loss)
(224.8)
(28.9)
(195.9)
(676.7)%
Translation reserve reclassification due to disposal of subsidiary
(30.3)
30.3
Net finance income/(costs)
(278.6)
(105.2)
(173.4)
(164.9)%
Profit before income tax
(323.3)
135.3
(458.7)
(338.9)%
36.0
(31.4)
67.4
214.9%
Profit from continuing operations
(287.3)
103.9
(391.2)
(376.4)%
Revenue - General Overview
To date, we have derived revenues from three sources: rental income, sale of residential properties and construction consulting and construction management fees.
We derive rental income from our investment properties and hotels that we acquired or developed in the past.
Change 2014/2013
%%
Investment property
107.0
104.1
2.9
2.8%
H2O office building
2.1
2.6
(0.5)
(19.9)%
Berezhkovskya office building
4.3
5.4
(1.1)
(20.7)%
Paveletskaya I
4.0
5.0
(1.0)
(20.3)%
Premises at Bolshaya Pochtovaya
5.1
5.7
(0.6)
(10.3)%
Premises at Plaza IV (Gruzinsky Val)
(0.1)
(48.7)%
Premises at Tverskaya Zastava Square
3.4
3.9
(14.5)%
Ozerkovskaya (Aquamarine) III
n/a
Other land bank assets
0.0
498.7%
Hotels
Aquamarine hotel
7.2
9.8
(2.6)
(26.2)%
Plaza Spa Hotel (Zheleznovodsk)
8.0
7.9
Total
144.7
(3.3)
(2.3)%
AFI MALL Parking
54.5
(54.5)
(100)%
Ozerkovskaya II
1.7
0.8
45.2%
4 Winds residential
1.4
(1.4)
On 3 June 2013 the Company completed the first stage of the sale of 643 parking spaces of AFIMALL City to VTB Bank and therefore recognised revenue of US$54.5 million in the income statement. During 2014 the Company sold 2 residential apartments and 14 parking lots in the Ozerkovskaya II project.
Operating expenses. Our operating expenses decreased by US$14.0 million, from US$76.5 million in 2013 to US$62.5 million in 2014. The year-on-year decrease of 18.3% is attributable to decreased property tax charge, decrease in brokerage expense and rouble devaluation versus the dollar.
Administrative expenses. Our administrative expenses increased by US$5.4 million or 31.9% year-on-year, from US$16.9 million in 2013 to US$22.3 million in 2014. The increase is attributable to increase in bad debt provision from US$0.9 of reverse in 2013 to US$4.6 of additional charge in 2014.
Profit on sale of investment properties. In December 2013, the Company successfully completed the sale of Building 1 in the Aquamarine III office complex (also known as Ozerkovskaya III) to Russian diamonds miner and producer "Alrosa" JSC. The total profit on disposal was US$27.8 million, including the consideration paid in cash and amounted to US$91.5 million.
Profit on sale/disposal of properties/investment. In March 2014 AFI Development disposed of its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project for US$1,400 thousand. The disposal followed the decision not to develop the project. The resulting profit on sale amounting to US$61 thousand was recognised in the income statement of Q1 2014. For additional information, please refer to "Disposals and acquisitions" section above.
Net valuation gain/(losses) on properties. Net result of investment property valuation decreased from a gain of US$106.2 million in 2013 to a loss of US$85.9 million in 2014. For additional information, please refer to "Portfolio Valuation" section below.
Finance income. Our finance income decreased by US$13.9 million or 66.5% year-on-year, from US$21.0 million in 2013 to US$7.0 million in 2014. The decrease was a result of loans write-off in 2013.
Finance expense. Our finance expense decreased by US$6.1 million or 9.1% year-on-year, from US$66.9 million in 2013 to US$60.8 million in 2014. The decrease followed full repayment of the Sberbank loan at our Plaza Spa Zheleznovodsk project in 2013 and partial repayment of the principal of the VTB bank loan as per the agreed loan facility at AFIMALL City project. In addition in Q1 2014 the Company fully repaid the fourth instalment (RUR 1,333 million) to the City of Moscow for the acquisition of the parking area under the AFIMALL City which cancelled discounting charges on long-term portion of the liability.
FX Gain/(Loss). We recorded a foreign exchange loss of US$224.8 million in 2014, against a loss of US$28.9 million in 2013. This was a result of Russian Rouble depreciation versus the US Dollar during 2014.
Income tax expense. Our current tax expense decreased to US$0.6 million compared to US$8.9 million in 2013 mainly due to tax obligations incurred as a result of sale of the office building in Ozerkovskaya III in 2013.
Profit/Loss for the year. Due to the factors described above, we recorded a US$287.3 million net loss for 2014 compared to net gain of US$103.9 million for 2013.
Liquidity and Capital Resources
Cash flows
Summary of cash flows for 2014 and 2013
US$ thousand
Net cash from operating activities
64,494
19,095
Net cash from/(used in) investing activities
(116,540)
(203,106)
Net cash from/(used in) financing activities
(42,183)
198,974
Effect of exchange rate fluctuations
(12,345)
3,518
Net increase/(decrease) in cash and cash equivalents
(106,574)
18,481
Cash and cash equivalents at 1 January
193,330
174,849
Cash and cash equivalents at 31 December*
86,756
* Note: the cash and cash equivalents do not include US$6.5 million (2013: US$10.0 million) fair value of marketable securities.
Net cash from operating activities increased to US$64.5 million in 2014, from US$19.1 million in 2013. The increase is attributable to advances received from customers for the sale of residential properties at the Odinburg project.
Net cash from investing activities
Net cash outflow from investing activities amounted to US$116.5 million is attributable to payments for construction and acquisition of investment property and investment property under development mainly.
Net cash used in financing activities
Net cash from financing activities decreased to a negative US$42.2 million in 2014 from a positive US$199.0 million in 2013 due to the fact that in 2013 there was increased debt financing and the new loan facility of US$220 million obtained by Krown Investments LLC.
Capital Resources
Capital Requirements
We require capital to finance capital expenditures, consisting of cash outlays for capital investments in active real estate development projects; repayment of debt; changes in working capital; and general corporate activities.
Real estate development is a capital-intensive business, and we expect to have significant ongoing liquidity and capital requirements in order to finance our active development projects.
For the foreseeable future, we expect that we will continue to rely on our financing activities to support our investing and operating activities. We also expect that our capital expenditures in connection with the development of real estate properties will comprise the majority of our cash outflows for the foreseeable future.
We completed 2014 with a strong liquidity position of approximately US$93.3 million cash, cash equivalents and marketable securities on our balance sheet and a debt[8] to equity level of 53%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.
Our financing strategy aims to maximize the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning we aim to refinance the properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.
As of December 31, 2014 our debt portfolio was as follows:
Project
Lending bank
Max debt limit
Principal balance as of Dec-31, 2014
Available (US$ mn)
Nominal Interest rate
Currency
Maturity
(US$ mn)
(dd.mm.yy)
VTB Bank JSC
502.1(21 billion rub)*
184.7
0
9.5%
RUR
01.04.2018
296.4
3-month LIBOR + 5.02%
US$
Krown Investments LLC
220.0
205.0
3-month LIBOR + 5.7%
26.01.2015*
* In January 2015 the loan was refinanced by VTB Bank JSC, please refer to Note 41 to the Consolidated Financial Statement
The total balance of Debt financing reached US$686.4 million as at 31 of December 2014, including US$686.1 million of Principal Debt and US$0.3 million of Accrued Interest with Average Interest Rate 6.88% per annum as at 31.12.2014 (6.97% respectively as at 31.12.2013) (for more details see note 28 to our consolidated financial statements).
As at 31 December 2014, our loans and borrowings were payable as follows:
As at 31 December 2014
As at 31 December 2013
Less than one year
231,684
27,027
Between one and five years
455,097
778,909
686,781
805,936
Portfolio Valuation
As at 31 December 2014, based on the Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$1.38 billion, while the value of the portfolio of investment property under development stood at US$0.4 billion.
Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2014, was US$2.0 billion, compared to US$2.4 million as at 31 December 2013.
Property4
Valuation 31/12/2014, US Dollars
Valuation 31/12/2013, US Dollars
Change in valuation, %
Balance sheet value 31/12/2014, US Dollars
Balance sheet value 31/12/2013, US Dollars
1
H2O
12,100,000
17,300,000
-30%
2
Ozerkovskaya Phase III
300,000,000
323,700,000
-7%
3
Berezhkovskaya1
15,762,000
28,490,000
-45%
21,300,000
38,500,000
4
1,000,000,000
1,160,000,000
-14%
5
Paveletskaya I3
19,338,150
29,354,320
-34%
19,500,000
29,600,000
6
Plaza II
15,200,000
31,900,000
-52%
7
Plaza Ib
5,400,000
8,800,000
-39%
8
Sadovaya -Samotechnaya
1,916,234
1,369,716,384
1,599,544,320
-17%
1,375,416,234
1,609,800,000
Investment property under development
9
Plaza Ic
87,700,000
110,600,000
-21%
10
Plaza IIa
3,600,000
12,400,000
-71%
11
Plaza IV2
101,753,623
159,980,000
-36%
107,109,076
168,400,000
12
Paveletskaya Phase II3
66,840,580
91,930,590
-27%
67,400,000
92,700,000
13
Kossinskaya
53,700,000
106,700,000
-50%
14
Bolshaya Pochtovaya
108,300,000
139,400,000
-22%
421,894,203
621,010,590
-32%
427,809,076
630,200,000
Trading property & Trading property under development
15
Odinburg
133,035,537
127,212,941
16
Four Winds Residential
624,284
1,104,444
17
2,355,115
5,304,038
136,014,935
133,621,424
Inventory of real estate
18
Botanic Garden5
18,100,000
20,111,111
Land Bank Properties
19
Ruza
3,665,000
20
St. Petersburg
1,400,000
-100%
21
Boryspol (Ukraine)
5,065,000
22
Aquamarine Hotel
17,343,063
30,855,838
23
Plaza Spa Hotel in Kislovodsk 4
14,414,050
24,829,575
24
Kalinina Hotel in Zheleznovodsk
12,249,094
22,417,076
25
Park Plaza hotel developments in Kislovodsk
4,241,520
7,276,236
26
Versailles project in Kislovodsk
7,122,840
48,247,727
92,501,565
Grand Total
1,809,710,587
2,221,954,910
-19%
2,011,264,083
2,471,187,989
Principal Risks and Uncertainties Affecting the Company
This section presents information about the Company's exposure to each of the risks listed below, the Group's objectives, policies and processes for measuring and managing risks.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework and is responsible for developing and monitoring the Company's risk management policies.
The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company's Audit Committee oversees how management monitors compliance with the Company's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Company's Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and the whole Board of Directors. The Board of Directors requests the management to take corrective actions as necessary and make follow up reports to the Audit Committee and to the Board on addressing deficiencies found.
Credit risk
Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables from customers and investment securities.
Trade and other receivables
Financial assets that are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivables represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, including outstanding receivables. The Company has policies in place to ensure that, where possible, rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored.
AFI Development has no other significant concentrations of credit risk, although collection of receivables could be influenced by economic factors.
Investments
The Company limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any existing counterparty to fail to meet its obligations, except as disclosed in note 33 to the Company's Audited Financial Statements for year 2014.
Guarantees
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2014, there were two outstanding guarantees: one for the amount of US$1 million in favour of VTB Bank JSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City) and the second one for the amount of US$205 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III).
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. AFI Development's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.
AFI Development's liquidity position is monitored on a daily basis by the management, which takes necessary actions if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the available returns for shareholders. We are exposed to market risks from changes in both foreign currency exchange rates and interest rates. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks. To date, we have not utilised any derivative or other financial instruments for trading purposes.
Interest rate risk
We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2014, 27% of our financial liabilities were fixed rate. For more detail see note 33 to our consolidated financial statements.
Currency risk
The Company is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of AFI Development's entities, primarily the US Dollar and Russian Rouble.
Operational risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.
The Company's objective is to manage operational risk so as to balance the need to avoid financial losses and damage to the Group's reputation with overall cost effectiveness.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk. Compliance with Company standards is supported by a programme of periodic reviews undertaken by way of internal audits. The results of the internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and the Board of Directors.
Critical Accounting Policies
Critical accounting policies are those policies that require the application of our management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below.
A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in notes 3 and 5 to our consolidated financial statements.
Estimates regarding fair value
We make estimates and assumptions regarding the fair value of our investment properties that have a significant risk of causing a material adjustment to the amounts of assets and liabilities on our balance sheet. In particular, our investment properties under development (which currently comprise the majority of our projects) are remeasured at fair value upon completion of construction and the gain or loss on remeasurement is recognised in our income statement, as appropriate. In forming an opinion on fair value, we consider information from a variety of sources including, among others, the current prices in an active market, third party valuations and internal management estimates.
The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data and actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition. For further details, please refer to Note 3 to our consolidated financial statements.
Impairment of financial assets
We recognise impairment losses with respect to financial assets, including loans receivable and trade and other receivables, in our income statement if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. We test significant financial assets for impairment on an individual basis and assess our remaining financial assets collectively in groups that share similar credit characteristics. Impairment losses with respect to financial assets are calculated as the difference between the asset's carrying amount and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate of that asset.
Estimating the discounted present value of the estimated future cash flows of a financial asset is inherently uncertain and requires us both to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Changes in one or more of these estimates can lead us to either recognizing or avoiding impairment charges
Impairment of non-financial assets
We recognise impairment loss with respect to non-financial assets, including investment property under development and trading properties under construction, if the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, we discount estimated future cash flows of the asset to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amounts of impaired non-financial assets are reduced to their estimated recoverable amount either directly or through the use of an allowance account and we include the amount of such loss in our income statement for the period.
We assess at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, we then estimate the recoverable amount of the asset. Estimating the value in use requires us to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The development of the value in use amount requires us to estimate the life of the asset, its expected cash flows over that life and the appropriate discount rate, which is primarily based on our weighted average cost of capital, itself subject to additional estimates and assumptions. Changes in one or all of these assumptions can lead to us either recognizing or avoiding impairment charges
Deferred income taxes
We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as capitalization of expenses, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess, in the course of our tax planning process, our ability and the ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future taxable profit and available tax planning strategies. If, in our management's judgment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability to fully recover deferred tax assets. In our consolidated financial statements the analysis is based on the estimates of taxable income in the jurisdictions in which we operate and the period over which the deferred tax assets and liabilities will be recoverable.
If actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could adversely affect our financial position and results of operations.
Share-based payment transactions
The fair value of employee share options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historic experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
Related Party transactions
There were no related party transactions (as defined in UK Listing Rules) in the financial year ended 31 December 2014 or in the period since 31 December 2014.
A. General - the projects the Group plans and constructs in CIS are mostly zoned for mixed uses and/or commercial use, while some also include residential units intended for sale. The following tables present the Group's projects including, among others, construction for residential purposes. The Company is focusing on the construction and completion of a number of projects and it will decide on the construction of additional projects out of its inventory of projects based on the situation prevailing in the market. With respect to these projects, the Company will formulate a business plan including a forecast relating to the project budget and its completion date (and obviously relating to additional project components) when a decision to begin its construction is made. Therefore, the tables do not include any forecasts in connection with these projects.
It is noted that based on Russian law, upon completion of the construction of projects, the owner of the building (the construction of which was completed) is permitted to receive lease (including long-term lease), generally for 49 years, or ownership rights for the state or municipality-owned land on which the said building stands and that is needed for purposes of its use. In order to realize the ownership or lease right as stated, the owner of the building must submit a request to the relevant authority including the required documents, and within about one month from the submission date of the said request, the relevant authority will make a decision regarding provision of the lease or ownership rights. It is noted that under the new long‑term lease agreement to be signed between the parties, the lessee of the land (who up until now had been merely the owner of the building) to pay the City lease fees (generally on a quarterly basis). Should the owner acquire ownership right to the land, it becomes payer of the land tax calculated based on the cadastral value of the land plots.
B. Set forth below information on residential projects under development as December 31, 2014:
(1) "Number of residential units sold" - based on signed contracts only[9]
The information in the table below regarding expected completion date of the project is forward looking information which is based on Company's information as at the date of this report. It may be that due to reasons which are external to the Company, the project will not be completed on these dates.
Location
No. of units under construction as at Dec. 31, 2014 cumulatively[10]
Additional commercial area under construction - sold
Additional commercial area under construction - unsold
Average sqm per unit (for gross construction)
Costs actually paid (consolidated)
Average completion rate of the project[11]
Anticipated completion date[12]
No. of units sold as at
No. of units in inventory as at December 31
No. of units sold after Dec. 31, 2014 and until March 15, 2015
31.12.14
31.12.13
31.12.12
Odinburg, Odintsovo, Moscow Region Phase 1 Stage 1
1,512
3,916
54
133,036
13%
December 2015/
December 2016
562
104
161
619
32
Phase 1 Stage 2
According to the investment agreement, the project should contain 453,000 sq.m. of residential areas after completion and social amenities (such as a school, and a kindergarten, both of which will be constructed in two stages, a healthcare center, etc.). As at the date of this Periodic Report, the property company has received approval for the planning and design documents and a building permit in effect until May 30, 2017, regarding the first two stages of the first phase of the construction of one residential building in the project containing 2,652 housing units, pursuant to the revised project documents.
It should be noted that in the investment agreement in respect of Odinburg, the Property Company is required to build a school and a kindergarten by the middle of 2010. Since the projects were frozen before that date due to the financial crisis, the Property Company did not keep to said original scheduled timetable in connection with the construction of said facilities, so that it has been in breach of the agreement since the middle of 2010. In July 2011, the municipal authority of the Odintsovo region sent a letter to the Property Company concerning the Property Company's failure to abide by the timetable determined in the investment agreement and notified the Property Company that it was considering terminating the investment agreement. The Property Company replied to the letter and thus negotiations began with the municipal authority of the Odintsovo region. As a result of said negotiations, additional developments began in the project, specifically the grant of a building permit to the Property Company. It should also be noted that the Property Company is engaged in negotiations to extend the investment agreement and the lease agreements in connection with the 38 plots of the project, to make the period of their validity consistent with that of the building permit.
Under the investment agreement (from 2004) between the building department of Moscow region, the Odintsovo municipal authority and the Property Company holding the project as previously stated, Property Company will be entitled to receive 94% of the residential areas in the project with the addition of an area of 13,400 sqm of apartments, while the Odintsovo municipal authority will be entitled to receive the remaining area (including the facilities for public use). Property Company will be entitled to 90% of the total non-residential areas. Moreover, the holding company has an option (the period of which is not defined in said investment agreement) to purchase the municipal authority's share in the areas allocated for residences as previously stated (in whole or in part) at a price to be agreed between the parties. Under the investment agreement, the project company is not entitled to sell apartments in the project until the municipal authority has taken delivery of the part of the residential area allocated to it under the agreement. The Company and the municipal authorities are currently negotiating amendments to a number of provisions in the Investment Agreement with the aim of allowing said sales to be made at an earlier date.
Notably, there are 38 lease agreements with said holding company in respect of an area of 317,000 sqm required for the construction of the project. These agreements were signed in 2009 for the period until May 25, 2014 after the legal proceedings were completed (mainly technical) that the Property Company initiated against the Odintsovo municipal authority to enforce its rights to enter into these agreements. As for the ownership of the land, it should be noted that the ownership is only of a reduced area (8,400 sqm) required for the construction of the project.
Average price RUR per square meter on company projects as December 31, 2014:
Project Name
1.1.2015 - 15.3.2015
2014
2013
Odinburg - Phase 1, Stage 1
102,172
91,360
80,574
Expected information (000'$)[13]:
The information in the table regarding total expected income, total expected costs, gross profit and its ratio is based on assumptions, forecast and/or business plans of the Company, of which there is no certainty of full realisation. It should be clarified that the estimation of the expected income is based on sale prices in the project and the expected cost (except of the land cost which is known in total or partially) is based mainly on signed contracts with constructors and advisors. Total expected income, total expected costs, gross profit and its ratio may differ from the information in the table in case that the Company's forecast or its business plan is not realised, fully or partially.
Project Location
Anticipated revenues (consolidated)[14]
Expected costs (consolidated)[15]
completion rate based on the cash flow of the project
Expected gross profit (consolidated)
Expected gross profit margin
Net Cash flow on project completion
Prepayments until Dec. 31, 2014
Future debt balances for units sold
Inventory at selling prices as at Dec. 31, 2014
Total expected revenue
Costs to pay until end of inventory
Total expected costs
Odinburg, Odintsovo, Moscow Region Phase 1, Stage 1
Phase 1, Stage 2
54,683
6,721
116,682
178,086
902,321
1,035,357
5,351
3%
3,313
Sensitivity Analysis
Following is a sensitivity analysis of gross profit of projects in which units sold are less than half of the inventory
Odinburg - Phase 1, Stage 1+2
Costs/Sales
90%
95%
98%
100%
103%
105%
110%
4,816
13,720
18,172
22,624
27,076
31,529
40,433
(3,821)
5,083
9,535
13,987
18,440
22,892
31,796
(8,140)
765
5,217
9,669
14,121
18,573
27,478
(12,458)
(3,554)
899
9,803
14,255
23,159
(16,776)
(7,872)
(3,420)
1,032
5,484
9,937
18,841
(21,095)
(12,190)
(7,738)
(3,286)
1,166
5,618
14,523
(29,731)
(20,827)
(16,375)
(11,923)
(7,471)
(3,019)
5,886
Following are the details of projects not yet started (excluding contingent projects and excluding land reserves as detail below) as at December 31, 2014:
Project, Location
Company share
Rights Acquisition Date
Units according to valid City Building Plan
Units according to Company Plan
Primary additional, retail or office area (GBA, sqm)
Type of acquired rights
Cost of land in books as at December 31, 2014 (consolidated)
Total cost of the project (including land) (consolidated)[16]
Anticipated gross profit margin[17]
Anticipated gross profit margin(%)
Anticipated year of commencing construction[18]
Anticipated duration of construction in years
Statutory Status
Current
Planned
Phase 1 (Stage 3+4) and Phase 2
2006
7,627
37,644
Land lease, City Building Plan
N/A
32,961
4%
2016
Land lease
Including City Share of circa 6% of Residential area*
Land bank designated for Residence as at December 31, 2014:
Company Share
Purchase Date
Land Area, Ha
Number of units according to valid City Building Plan
Additional units planned
Type of rights
Historic cost
Land cost at 31.12.14 (book value)
Total estimated project cost (including historic cost)
Legal rights status
Botanic Garden
11-13 Serebryakova lane, Moscow
2007
3.2
1,372
Land lease, Investment agreement with the City
161,477
20,100
405,408
Construction permit
C. Set forth below are the details in connection with projects the Company has executed in CIS, which include residential areas, and which were completed as at December 31, 2013:
(1) As at the date of this statement, the Company's group has completed the projects Four Winds Residential and Ozerkovskaya Phase II. The Company's group has sold the majority of residential units in the both of the residential complexes.
(2) As at December 31, 2013, the Company's group held (indirectly) property rights in 1 residential unit in the Four Winds Residential project and in 3 residential units in the Ozerkovskaya Phase II project.
In its residential real estate development activities in Russia, the Group targets mainly private customers with a high socio‑economic background. For the Odinburg project the target customers are of medium to low socio-economic background.
In this area of activities, the Group markets its projects through independent agents as well as by own marketing and sales workforce.
General Information regarding the Activity Segment
The Company's group plans, develops and constructs commercial properties held for rent. The Group's revenues from its activities in the field of lettable properties in Russia derive mainly from the development, re‑development and sale of commercial properties, alone or together with partners in joint ventures, as well as from rent of the group's lettable properties. In addition, in the past the Company's group had insignificant revenues from management of projects not owned by it.
General Economic Parameters Regarding the Russian Market:
Macro-economic parameters:
Gross domestic product (US$ billion) [19]
2,057
2,096
2,017
Per capita product (PPP)[20]
24,764
24,297
23,699
Rate of growth in domestic product in Real GDP[21]
3.4%
Rate of growth in per capita product
1.9%
2.5%
5.6%
Rate of inflation (end period)[22]
6.6%
Rate of return of long-term local government bonds
6.3%
8.1%
7.6%
Rating of long-term government bonds
BBB- (S&P)
BBB (S&P)
Rate of exchange of the local currency in relation to the dollar on the last day of the year
56.3
32.7
30.4
Products and Services
The following tables present information in connection with the Group's projects included in its property portfolio. Certain information presented in the tables includes estimates and forecasts relating to projects in advanced stages of development, that is, the concept or design stages. Such information is "forward looking information" based on the existing data and facts in the Company's possession as of the date of this statement. It is hereby clarified that the estimates and forecasts in connection with each of the Group's projects may change in the future.
1. Summary of Aggregate Results of the Investment Properties Activity made by the Group in the CIS (sums are in US dollars unless otherwise specified):
(a) Breakdown of the lettable property areas based on regions and uses as at 31.12.14 (sq.m.)
Region
Uses
Offices
Retail
Parking facilities
Percentage of the areas
Russia
Consolidated
87,482
107,208
62,789
257,479
84,693
254,690
Percentage of the total area
34%
42%
24%
33%
25%
(b) Breakdown of the lettable property areas based on regions and uses as at 31.12.13 (sq.m.)
87,490
257,487
84,701
254,698
(c) Breakdown of the lettable property value based on regions and uses as at 31.12.14
Other*
Total in USD '000
Percentage of the total value of the properties
373,500
1,000,000
1,900
1,375,400
USD '000
company share
367,790
1,369,690
27%
73%
0%
* Includes Sadovaya-Samotechnaya
(d) Breakdown of the lettable property value based on regions and uses as at 31.12.13
449,800
1,160,000
1,609,800
439,530
1,599,530
28%
72%
(e) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.14
Percentage of the total NOI of the properties
Russia USD '000
10,355
82,956
93,311
9,467
92,422
Total USD '000
11%
89%
10%
(f) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.13
11,477
69,020
80,497
10,343
79,363
14%
86%
87%
(h) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.14
Percentage of the total revaluation income
8,892
101,281
609
110,782
12,422
114,312
8.0%
91%
1%
(i) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.13
164
41,398
41,563
1,050
42,449
0,4%
2%
(k) Breakdown of the actual average rent per sq.m. per year in the functional currency
For the year ended*
Regions
Russia - USD/sq.m/annum
281**
465**
1,147
1,231
5,616
6,000
* The main difference in rates is related to significant devaluation of the rouble at year end
** Not including Ozerkovskaya III project
(l) Range of annual rent per square meter offices in USD
Minimum
Maximum
173
597
313
973
2012
307
1,604
(m) Breakdown of the average occupancy rates
In %
Retail*
As at
As at 31.12.13
Year 2014
Year 2013
87%**
85%**
84%**
85%
79%
83%
76%
* Presented in relation to total lettable areas
** Not Including Ozerkovskaya III project and Sadovaya-Samotechnaya
(n) Number of properties based on regions and uses
Offices***
*** Not including Ozerkovskaya III project and Sadovaya-Samotechnaya
(o) Breakdown of the actual average rates of return (based on year-end value) for regions and uses
For the year ended on (in %)
Offices****
8%
9%
6%
**** Not Including Ozerkovskaya III project and Sadovaya-Samotechnaya
(p) Expected revenues in respect of signed lease agreements
Assuming tenant option not exercised
Assuming tenant option are exercised
Period of Recognition of Revenue
Revenues from fixed components* ($ '000)
Number of agreements completed
Area of related agreements (sq.m. '000)
Revenues from fixed components ($ '000)
Quarter 1/15
33,557
494
126,310
Quarter 2/15
31,603
428
119,507
Quarter 3/15
29,617
358
95,263
Quarter 4/15
27,725
300
85,267
69,165
264
80,912
2017
44,294
129
58,474
2018
32,221
73
50,460
Thereafter
74,232
42,121
342,414
2,100
658,312
* Does not include revenue from parking
2. Summary of aggregate assets designated for development of income yielding properties
(a) Investment projects under development
Period (year ended on)
Parameters
31.12.2014
31.12.2013
31.12.2012
Russia- Office
Number of properties under construction at end of the period
3[23]
Total areas under construction (planned) at end of the period (in sq.m. '000)
180,310
169,700
281,470
Total costs invested in current period (consolidated) (USD '000)
18,367
2,011
7,784
The amount at which the properties are presented in the financial statements at the end of the period (consolidated) (USD '000)
198,409
291,400
409,300
Total balance of the Construction budget in the succeeding period (consolidated) (estimate as at the end of the period) (USD '000)
73,803
94,667
109,229
Total balance of the estimated construction budget for completion of the construction work (consolidated) (estimate as at the end of the period) (USD '000)
246,134
352,077
408,574
Rate of the built-up area regarding which lease agreements have been signed (%)
Russia - Retail and other
3[24]
433,493
170,350
65,941
14,685
1,649
229,400
338,800
141,300
197,467
253,089
127,359
448,495
633,678
318,419
(b) Data on land of the company in the CIS designated for the construction of yielding property
Area
Period (year ending on)
31.12.2014*
The amount at which the land is presented in the financial statements at the end of the period (consolidated) (functional currency)
3,665
5,065
Total area of the land at the end of the period (sq.m. '000)
3,870,000
3,893,332
Total construction rights in land according to approved building plans, by uses (USD thousand)
* The change is due to disposal of the St.Petersburg project
3. Significant Investment Properties - Tverskaya Plaza II
Information Item
Additional Data Required by Regulation 8B(I) (as applicable)
Property name and characteristics
Year
Book value at end of the period (consolidated) $ '000
Fair value at end of the period (consolidated) (in the functional currency)
Rental income in the period (consolidated) (in the functional currency)
Actual NOI in the period of the report - consolidated - in the functional currency
Yield (%)
Adjusted yield (%)
Yield on Cost (%)
Loan/Property value (LTV)
Revaluation (consolidate) $ '000
Occupancy rate for the end of period
Average rent $/sq.m/annum
Identity of the appraiser (name and experience)
Valuation model used by the appraiser
Additional assumptions serving as the basis for the valuation (discount rate, number of comparable properties, average price per sq.m. of the comparable properties)
Tverskaya Plaza II
15,200
2,432
1,825
12,0%
2.4%
(12,326)
82%
404
Cushman&Wakefield
DCF
Cap Rate -13%
Discount rate -19%, Average market rate (after contracts re newal) Office -$400; Retail-$1000
31,900
2,953
2,320
7.3%
(4,036)
96%
575
Cap Rate -11.5%
Discount rate -16%, Average market rate (after contracts re newal) Office -$550; Retail-$1500
Note functional currency
31,500
2,541
1,952
6.2%
(42,619)
493
Discount rate -16%, %, Average market rate (after contracts re newal) Office -$550; Retail-$1500
Main use
Office
2011
76,900
1,993
1,504
2,403
441
JLL
Was valuated as development project, 25% developer fee, Cap Rate -9%, Discount Rate -15.1%, USD180mn development costs, , %, Average market rate Office -$875; Retail-$650
Original cost / original construction cost (in the functional currency)
76,675
Company's share (%)
Area (sq.m.) -GLA
5,856.26
4. Significant Investment Properties - Ozerkovskaya III
Ozerkovskaya III
300,000
110
(2,162)
68%
32,873
792
Cap Rate -10%
Discount rate -14,5%, Average market rate Office -$650-800; Retail-$460
323,700
63%
7,289
Discount rate -14%, Average market rate Office -$750-900; Retail-$500
194,550
2,723
Discount rate -14%, Average market rate Office -$750; Retail-$500
177,600
32%
17,989
Cap Rate -9.5%
Discount rate - 9.8%
Average market rate Office -$850; Retail-$450
305,142
46,247
5. Information Regarding a Very Substantial Investment Property - AFIMALL City
(a) Presentation of property:
Detail as at December 31, 2014
Name of the property:
Location of the property:
2 Presnenskaya emb., Moscow
Areas of the property broken down by use:
GBA (gross building area) - 166,072 sq.m (GBA together with the underground parking - 283,182 sq.m)
GLA (gross leasable area) - 107,208 sq.m
Gross Leasable Retail Area - 96,800 sq.m
Areas leased as of December 31,2014 - 90,871 sq.m
2,075 underground parking units[25]
Structure of holdings in the property (description of holding through investee companies, including the rates of holdings therein and the rates of their holdings in the property):
The Company holds the asset through a wholly-owned Cypriot subsidiary, Bellgate Construction Ltd
Effective share of the Company in the property (if the property is held by an investee company - multiplication of the company's share in the investee company by the share of the investee company in the property):
The Company holds 100% in Bellgate Construction Ltd which bears 100% of construction expenses and has 100% in AFIMALL CITY
State the names of the partners in the property (if the partners hold more than 25% of the rights in the property or if the partners are related parties as defined in this Directive)*:
Not relevant
Acquisition date of the land (if relevant):
2005/2012[26]
Detail of the legal rights in the property (ownership, lease, etc.)
Ownership of AFIMALL City and the underground parking
Lease rights to the underlying land plot
Status of registration of the legal rights[27]:
Registered
Significant unused building rights
None
Special matters (significant non‑conforming construction, ground contamination, etc.):
Certain premises of the AFIMALL City with total area of 5,829.71 sq.m and of the underground parking with the total area of 16,318.3 sq.m are located beyond the boundaries of the land plot co-leased by Bellgate Construction Ltd. Bellgate Construction Ltd. will have to procure lease rights to the land underlying such premises.
Method of presentation in the financial statements [consolidation / proportionate consolidation / equity method]:
Consolidation
(b) Significant Data:
(Data based on 100%. AFI Dev. Share - 100%) Property classified as investment real estate in March 2011
Q4 2014
Q3 2014
Q2 2014
Q1 2014
On property purchase date
Fair value at end of period (USD'000)
Purchase/construction cost (USD '000)
600,585
Valuation profit or loss (USD '000)
(3,655)
88,473
(35,442)
51,904
If property valued by rise-fall (cancellation of fall) in value for period (USD '000)
Purchase date
July 2005
Average occupancy rate (%)[28]
Actual rented areas (m2)
90,871
87,599
87,760
87,710
81,170
Total revenue (USD '000)
24,291
26,033
28,689
27,955
104,075
Average rent per meter (annual)
1,201
1,202
1,224
Average rent per meter in contracts signed in period (USD '000)
1,035
1,667
1,286
673
915
NOI for period (USD '000)
18,641
25,007
22,501
16,807
NOI adjusted for period (USD '000)
Actual return rate (%)
8.3%
7.4%
6.8%
5.8%
5.9%
Adjusted return rate (%)
Number of tenants at end of period[29]
288
289
291
294
280
Average revenue per sq.m. (annual)
1,069
1,189
1,308
1,261
1,282
(c) Breakdown of Structure of Revenues and Expenses:
(Data based on 100%, AFI Development's share in the property - 100%)
in USD '000
Revenue:
From rent - fixed
95,253
92,237
74,079
From rent - variable
5,936
7,623
5,841
From management fees
From parking garage operation
5,780
4,214
974
Miscellaneous
518
Total revenue:
106,968
104,074
81,412
Costs:
Management, maintenance and operation
24,012
35,054
33,166
Depreciation (if recorded)
Miscellaneous costs
Total costs:
Profit
NOI
48,246
(d) Major Tenants in the Property:
(Data
based on 100%.
Share of company
in the property - 100%)
Share in
leased property area (%)
Is the tenant an anchor tenant?
Is the
tenant expected to be responsible for more than 20% of the revenue from the property?
Industry
to which the tenant belongs
Description of the lettable property
Entry date of tenants as agreed in the agreement
Lease term (years)
Options to extend (years)
Indexation (annual)
Detail of guarantees (if any)
Indicate special conditions
Tenant 1
7.1%
yes
no
cinema
Centre Opening Date
5%
Security Deposit
Tenant 2
4.5%
entertainment
08.10.2013
Step Rent
Tenant 3
3.2%
Tenant 4
2.6%
furniture & home décor
27.12.2013
Tenant 5
fashion
Tenant 6
2.3%
Tenant 7
2.1%
Bank Guarantee
Tenant 8
1.8%
Tenant 9
1.7%
Tenant 10
1.5%
Tenant 11
1.6%
7.5%
Tenant 12
1.4%
supermarket
Total major tenants
32.3%
(e) Projected Revenues in respect of Signed Lease Agreements:
Data
in the property -100%
(USD '000)
For the year ending in 2015
For the year ending in 2016
For the year ending in 2017
For the year ending in 2018
For the year ending in 2019 and onwards
Fixed components
112,550
68,568
43,792
32,144
74,161
Variable components (estimate)
(f) Planned Improvements and Changes for the Property:
Details:
Nature of improvement
Fit-out of entrance, sewerage improvements
Additional areas added
Statutory situation
Budget (USD '000)
900
Rate of the areas with respect to which rental agreements have been signed out of the additional areas
Expected addition to 2014 NOI (USD '000)
Execution status
Design stage
(g) Specific Financing:
Specific Financing
Credit facility:
Balances in the statement of financial position
Presented as short-term loans:
26,000
Presented as long-term loans:
455,059
573,914
Fair value as at 31.12.2014 (end of the report year) (USD '000)
Original credit facility date
June 22, 2012[30]
Original credit facility amount (USD '000)
Up to approx. 502,105.48 (RUR 21,000 million)
Effective interest rate as at 31.12.2014 (%)
9.5% in RUR; 3M Libor + 5.02% in USD
Repayment dates principal and interest
Quarterly Interest;
Repayment of the Principal Debt will start on 31 March, 2014 with the following Repayment Schedule:$6.5 million quarterly in 2014, 2015, 2016 ).
Final Repayment Date is 01, April, 2018.
Main financial conditions
Banking accept for any disposal of Project' premises exceeding 10% of total Borrower' Assets.
Liquidation Value of the Property under the Mortgage should be higher than amount of the outstanding Principal Debt and Interest payments accrued for the six months period.
Bellgate Construction Limited (the Borrower) should have minimum quarterly Revenues, ranging from RUR 651,000,000 in Q3 2012 to RUR 1,139,000,000 in Q1 2018. Penalty: 0.5% per annum extra charge to the Interest Rate applicable under the Loan Facility Agreement- applicable only for the Quarter when the aforesaid Revenue threshold has not been achieved.
Other financial conditions
State whether main conditions or financial covenants have been violated as at the end of the report year
The Company is in line with all financial Covenants
Is it non-recourse
Yes, except the Surety Agreement between the Company and the Bank. The Guarantee is limited by the amount of USD 1 million.
(h) Liens and other Significant Legal Restrictions in the Property:
Type
Details
Amount secured by the lien
(at the end of the report year)
(USD/RUR)
Liens
First priority
On 22 June, 2012 Bellgate Constructions Limited and the Bank of the VTB Group (the "Bank") entered into a Loan Facility Agreement for a total Principal Debt amount of to RUR 21,000 million (approx. USD 689 million). The total amount of the current Loan Facility Debt as at 31, December, 2014 is approx. USD 481 million.
The Loan Facility Agreement is secured by:
(i) the Pledge of 100% AFID' shares in Bellgate Constructions Limited capital;
(ii) Surety Agreement between the Company and the Bank for USD 1 million;
(iii) Mortgage of AFIMALL City' premises;
(iv) Mortgage of the underground AFIMALL City' premises (Parking) (and the Land lease rights;
(v) Mortgage of the Aquamarine Hotel' premises;
Surety Agreement between Semprex LLC (the Company subsidiary owning the Aquamarine Hotel) and the Bank.
Up to RUR 21,000 million (approx.. USD 502.11 million)
(i) Details with respect to the Valuation:
(Data based on 100%)
Value determined (USD '000)
Identity of appraiser
Cushman & Wakefield
Is the appraiser independent?
Yes
Is there an indemnification agreement?
Effective date of the valuation (the date to which the valuation relates)
Valuation model (comparison / income / other / cost)
Main details used for purposes of the valuation
(to be provided specifically based on the valuation provided) (the list is illustrative only):
If the valuation is by the Sales Comparison Approach
Gross leasable area used in the calculation (sq.m.)
Sale price per sq.m. of leasable area used in the calculation (USD)
Range of prices per sq.m. of leasable area of comparable properties used in the calculation (USD)
Number of comparable properties (#) used in the calculation
Regarding the main relevant properties used for comparison indicate: the name/identity of the property, location, area
Net rate of return reflecting the property's current NOI (current NOI divided by value of the property)
Other main parameters (annual rent growth rate)
2,5% (starting 2017)
If the valuation is by the Sales Income Approach
Occupancy rate in the year + 1 (%)
80%
70%
Occupancy rate in the year + 2 (%)
93%
75%
--
Representative occupancy rate out of the leasable area for purposes of valuation (%)
97%
Average annual rent per sq.m. leased for purposes of valuation in the year + 1
1,085
1,253
1,304
Average annual rent per sq.m. leased for purposes of valuation in the year + 2
1,140
1,323
1,386
Representative average annual rent per sq.m. leased for purposes of valuation (USD)
1,428
1,421
Representative NOI for purposes of valuation (USD'000)
133,730
149,016
156,950
Average periodic expenses for maintenance of the existing situation (USD'000)[31]
133
9,364
12,194
Capitalisation rate / rate of return / multiplier used for purposes of the valuation (%)
Capitalisation - 10.0%
Discount rate - 17%
Discount rate - 15%
Time until deemed realisation
5 years
Multiplier / reversionary rate
Other main parameters
Sensitivity analysis for value (based on the method chosen):
Occupancy rates
Increase of 2% (abs)
22,800
23,892
30,774
Decrease of 2% (abs)
(17,984)
(20,461)
(30,693)
Capitalisation rates
Increase of 1% (abs)
(50,576)
(61,431)
(70,581)
Decrease of 1% (abs)
60,691
73,717
86,266
Average rent per meter
Increase of 5% (rel)
33,457
42,921
45,338
Decrease of 5% (rel)
(33,457)
(42,921)
(45,338)
Increase of 10% (rel)
66,915
Decrease of 10% (rel)
(66,915)
6. Information Regarding Investment Property under Development - Bolshaya Pochtovaya
Valuation information and underlying assumptions
% of the asset's areas for which binding lease agreements were signed at end of the period
Completion % at end of the period (technical/
financial)
Financial information
Appraisal and valuation information
Cumulative cost at end of the period land, construction, other $ '000
Annual information for the asset
Name of the property and its characteristics
Revaluation
$ '000
Fair value at end of the period (consolidated) $ '000
Cap Rate - 11%
Discount rate - 22%
Average market sale price for apartments - 5,000 USD/sq.m; Retail - 4,000 USD/sq.m;
43%
(39,873)
108,300
226,127
Pochtovaya
Property name
-Discount rate - 19%
Average market sale price for apartments -6,000 USD/sq.m; Retail -5,000 USD/sq.m
39%
(834)
139,400
204,344
24, 30, 34 Bolshaya Pochtovaya.Str. Moscow, Russia
Proper ty location
USD
Functional currency
Leasehold to 4 land plots intended to be used for the project were acquired by the holding company in 2007 and 2012
Date of project /project's land pot acquisition
Discount rate - 19%
(74,603)
204,477
99.7%
Full consolidation
Method of representation in the consolidated financial statements
Jul-17
Estimated date of construction completion
Developer profit - 25%
Average market sale price for apartments -4,800 USD/sq.m;
38%
871
213,200
202,828
Residential - 56,952
Retail - 6,200
Office - 28,008
Project's planned areas (by use)
451,923
Total estimated cost (land, construction, other) (in 000'USD)
7. Information Regarding Investment Property under Development - Kossinskaya
Cap Rate- 13%
Discount rate - 20%
Average market rent
retail-$300; office-$200;
88%
(62,094)
53,700
260,930
Cap Rate- 12%
retail-$375; office-$250;
(6,697)
106,700
234,198
9-21 Kossinskaya st., ,Moscow, Russia
Property location
Leasehold to two land plots acquired in 2006 and 2009
Discount rate - 17%Average market rent
retail-$450; office-$250;
74%
(45,330)
102,700
221,883
100.0%
Company's share
Sept-15
Cap Rate- 12.25%
Discount rate - 14.2%
retail-$500; office-$225;
971
146,120
220,899
Retail - 52,997
Office - 8,476
Hotel - 3,527
Warehouse - 5,000
Asset's planned areas (by usage)
304,729
8. Information Regarding Investment Property under Development - Plaza IV
Cap Rate- 9,5%
Discount rate - 24%
retail-$1000; office-$700;
36%
(60,219)
107,109
126,776
Plaza IV
Cap Rate- 9%
retail-$1500; office-$875;
356
168,400
126,500
11 Gruzinskiy Val, Moscow
2006-2008, 2012
2,886
168,000
126,203
Jan-18
Cap Rate- 9.5%
Discount rate - 14.1%
office-$875
53,978
164,632
125,897
Office - 58,650 sqmRetail - 2,700 sqm
Project's planned areas (by usage)
267,210
Number of Employees as at:
Management
Financial
33
31
Marketing and sales
Business development, including
project management division
74
63
55
Legal
Administrative
36
42
178
159
149
· 52 employees, who currently work at the AFIMALL City project
· 126 of employees in Semprex LLC (vs 129 members in 2013), owning and operating the Aquamarine Hotel
· 284 employees in the Plaza SPA Zheleznovodsk project
· 456 employees in the Plaza SPA Kislovodsk project
Financing
As of December 31, 2014 Group's debt portfolio was as follows:
502.11(RUR21 billion)*
Annex B to the Management Discussion and Analysis
Below is additional information regarding the Company's very significant loans. Terms not expressly defined herein shall have the meaning ascribed thereto in the MD&A.
Balance as of 31.12.2014
Lender type: Bank, Institutional etc.
Indexation/ currency exposure & interest rate
Liens and material legal restrictions on the property
Covenants
Cross default mechanism
Any other covenants or restriction that might increase the cost of debt
In-case it is a credit line facility - what are the terms&conditions for draw downs
The methods/way that the covenant is calculated
Covenant calculation results
The date of Q4 2014 financial statement were reported
The date that the lender is checking the borrower is line with the covenants
USD 296,385,605 and RUR 10,391,546,950(USD 184,711,029). Total amount in USD as of 31.12.2014 is USD 481,096,634
Specific project financed by VTB Bank JSC
RUR/USD loan provided in five tranches totalling RUR 21 billion. Each tranche can be drown down either in US Dollars or in Rubles (at Company's discretion). The loan facility has differentiated interest rates which are currency dependent: 9.5% for loans drawn down in Russian rubles and 3 months LIBOR + 5.02% for loans drawn down in US dollars. The interest on the loans is payable on a quarterly basis, throughout the term of the credit line. The principal is due to be fully repaid in April 2018. The RUR interest rate may be unilaterally increased by the lending bank, should one of the interest indicators stipulated by the Russian Central Bank and specified in the loan agreement be increased; the interest rate will be increased by the amount of the interest indicator increase.
1. Liens over all the Bellgate's shares2. AFI Development PLC company guarantee, limited to USD 1,000,0003. Mortgage over 100% of the premises of AFIMALL City4. Mortgage over the premises in the Parking owned by Bellgate, upon registration of Bellgate's rights to land plot under the Parking5. Permission to debit Bellgate's account held in the lending bank 6. Additional mortgage over the premises of the "Aquamarine" Hotel in Moscow, to be removed in case Bellgate (the borrower) redeems USD 20 million of the principal 7. Additional guarantee by Semprex LLC, a Russian Company - an indirect subsidiary of AFI Development Plc, to be removed in case Bellgate (the borrower) redeems USD 20 million of the principal
(1) Bellgate'(the Borrower) should have minumum quarterly revenues, ranging from RUR 651,000,000 in Q3 2012 to RUR 1,139,000,000 in Q1 2018. Penalty: 0.5% per annum extra charge to the interest rate applicable under the loan agreement- applicable only for the quarter when the aforesaid revenue threshold was not achieved;(2) Liquidation Value of the property should be higher than sum of the outstanding principal and six months interest.
The loan is given in five tranches: 1st tranche drawn down on 29 June 2012, 2nd tranche drawn down on 3 August 2012 on the amount USD 69, 385,604.64 (RUR 2,252,000,000), 3rd tranche of RUR 1,300,000,000 drawn down on 01.02.2013, 4th tranche of RUR 1,333,333,333.33 drawn down on 28.02.2013 , 5th tranche of RUR 1,333,333,333.34 drawn down on 28.02.2014.
(1) The total of revenue, including VAT , calculated quarterly; (2) The Liquidation Value is determined by an external valuer appointed by the Bank.
(1) The minimum quarterly revenue for Q4 2014 was 961 millions Roubles ; (2) Liquidation Value determined by an external valuer appointed by the Bank is USD 681,5 million/RUR 36,9 bln (VAT not included)
(1) Borrowers revenues are checked quarterly; (2) Liquidation value is checked twice a year, on December and on August.
Note: During February 2014 the Company has financed the 4th installment of consideration for acquisition of underground car park at AFIMALL City by additional drawdown of RUR1.33 billion (US$37.5 million).
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Professional Advisers
Board of Directors' Report
Directors' Responsibility Statement
Independent Auditors' Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
BOARD OF DIRECTORS AND PROFESSIONAL ADVISERS
Board of Directors Lev Leviev - Chairman
Moshe Amit
Avraham Noach Novogrocki
Christakis Klerides
John Robert Camber Porter
Panayiotis Demetriou
Secretary Fuamari Secretarial Limited
Independent Auditors KPMG Limited
Bankers Joint Stock Company VTB Bank
Joint Stock Commercial Savings Bank of the Russian Federation (SBERBANK)
Raiffeisen Bank International AG
Registered Office Spyrou Araouzou 165,
Lordos Waterfront Building,
3035 Limassol,
Cyprus
BOARD OF DIRECTORS' REPORT
The Board of Directors of AFI Development Plc (the "Company") presents to the members its annual report together with the audited consolidated financial statements of the Company for the year ended 31 December 2014.
PRINCIPAL ACTIVITIES
The principal activities of the Group, which remained unchanged from last year, are real estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries.
EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE ACTIVITIES OF THE GROUP
AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction and quality and customer service.
As at 31 December 2014, the Company's portfolio consisted of 8 investment properties, 7 investment properties under development, 1 trading property under development, 1 property as inventory of real estate and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow.
FINANCIAL RESULTS
The Group's results are set out in the consolidated income statement on page 8. The loss of the Group for the year before taxation amounted to US$323,343 thousand (2013: profit US$135,331 thousand). The loss after taxation attributable to the Group's shareholders amounted to US$281,020 thousand (2013: profit
US$103,074 thousand).
DIVIDENDS
The Board of Directors does not recommend the payment of a dividend and the loss for the year is transferred to retained earnings.
MAIN RISKS AND UNCERTAINTIES
The most significant risks faced by the Group and the steps taken to manage these risks are described in note 33 of the consolidated financial statements.
FUTURE DEVELOPMENTS
The Group is one of the leading real estate development companies operating in Russia. It focuses on developing and redeveloping high quality commercial and residential real estate assets in Moscow and the Moscow Region. The strategy during the reporting period and for the future periods is to sell the residential properties that the Group develops and to either lease the commercial properties that the Group develops or sell them if the Group is able to achieve a favourable return.
SHARE CAPITAL
There were no changes to the share capital of the Company during the year. As at the year end the share capital of the company comprised:
· 523,847,027 "A" shares of US$0.001 and,
· 523,847,027 "B" shares of US$0.001
All "A" shares are on deposit with BNY (Nominees) Limited and each "A" share is represented by one GDR listed on the London Stock Exchange ("LSE").
All "B" shares were admitted to a premium listing of the Official list of the UK Listing Authority and to trading on the main market of LSE.
BRANCHES
The Group operates six branches and/or representative offices of Cypriot, BVI and Luxembourg entities in the Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City project, Amerone Ltd branch, Bugis Finance branch and Triumvirate I S.a r.I branch operating investment properties and Bastet Estates Ltd branch and Falgaro Investments Ltd branch acting as sale agents for residential properties.
BOARD OF DIRECTORS
The members of the Board of Directors as at 31 December 2014 and at the date of this report are shown on page 1. The directors' date of appointment and resignation, if applicable, is indicated on page 1. The term of those that have not resigned will expire on the date of the next annual general meeting of the shareholders but all of them are eligible for re-election. There were no significant changes in the assignment of responsibilities of the Board of Directors during the year.
POST BALANCE SHEET EVENTS
Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 41 of the consolidated financial statements.
INDEPENDENT AUDITORS
The independent auditors, KPMG Limited, have expressed their willingness to continue offering their services. A resolution reappointing the auditors and giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting.
By order of the Board
Fuamari Secretarial Limited
Secretary
Nicosia, 16 March 2015
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the directors, whose names are listed below confirm that, to the best of their knowledge:
· the consolidated financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and
· the adoption of a going concern basis for the preparation of the financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Group; and
· the Board of Directors' report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face.
The Directors of the Company as at the date of this announcement are as set out below:
The Board of Directors
Executive directors
Lev Leviev - Chairman .............................................................
Mark Groysman .............................................................
Non-executive director
Avraham Noach Novogrocki .............................................................
Non-executive independent directors
Moshe Amit .............................................................
Christakis Klerides .............................................................
John Robert Camber Porter .............................................................
Panayiotis Demetriou .............................................................
To the Members of AFI Development Plc
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of AFI Development Plc ("the Company") and its subsidiaries (together with the Company, the "Group"), which comprise the consolidated statement of financial position as at 31 December 2014, and the consolidated statements of income statement, comprehensive income and changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Board of Directors' Responsibility for the consolidated Financial Statements
The Board of Directors is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2014, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and the requirements of the Cyprus Companies Law, Cap. 113.
Report on Other Legal Requirements
Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013, we report the following:
· We have obtained all the information and explanations we considered necessary for the purposes of our audit.
· In our opinion, proper books of account have been kept by the Company, so far as appears from our examination of these books.
· The consolidated financial statements are in agreement with the books of account.
· In our opinion and to the best of the information available to us and according to the explanations given to us, the consolidated financial statements give the information required by the Cyprus Companies Law, Cap. 113, in the manner so required.
· In our opinion, the information given in the report of the Board of Directors is consistent with the consolidated financial statements.
Other Matter
This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.
Marios G. Gregoriades CPA
Certified Public Accountant and Registered Auditor
For and on behalf of
KPMG Limited
Certified Public Accountants and Registered Auditors
14 Esperidon Street
1087 Nicosia, Cyprus
16 March 2015
Note
US$ '000
144,088
202,261
3,507
6,409
(62,510)
(76,517)
Carrying value of trading properties sold
(1,632)
(32,623)
(22,303)
(16,911)
(6,773)
(5,480)
Total expenses
(93,218)
(131,531)
Share of the after tax loss of joint ventures
(4,451)
(798)
Gross Profit
49,926
76,341
Profit on disposal of investment in
subsidiaries/joint ventures
35
114
32,278
27,835
Valuation (loss)/profit on properties
15,16
(85,884)
106,234
(8,892)
(2,186)
Net valuation loss on properties
(94,776)
104,048
(44,736)
240,502
7,026
20,961
Finance costs
(285,633)
(126,132)
Net finance costs
(278,607)
(105,171)
(Loss)/Profit before tax
(323,343)
135,331
Tax benefit/(expense)
36,048
(31,386)
(Loss)/Profit for the year
(287,295)
103,945
(Loss)/Profit attributable to:
Owners of the Company
(281,020)
103,074
Non-controlling interests
(6,275)
Earnings per share
Basic and diluted earnings per share (cent)
(26.82)
9.84
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Realised translation difference on disposal of
subsidiaries/joint ventures transferred to income statement
(130)
30,042
Foreign currency translation differences for foreign operations
(164,659)
(35,960)
Other comprehensive income for the year
(164,789)
(5,918)
Total comprehensive income for the year
(452,084)
98,027
Total comprehensive income attributable to:
(445,446)
97,230
(6,638)
797
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to owners of the Company
equity
Share
Translation
Retained
capital
premium
reserve
earnings
Balance at 1 January 2013
1,048
1,763,409
(144,610)
9,661
1,629,508
(2,976)
1,626,532
Total comprehensive income
Profit for the year
(5,844)
(74)
Transactions with owners of the Company
Contributions and distributions
Share option expense
4,920
Balance at 31 December 2013
(150,454)
117,655
1,731,658
(2,179)
1,729,479
Balance at 1 January 2014
Loss for the year
(164,426)
(363)
4,383
Balance at 31 December 2014
(314,880)
(158,982)
1,290,595
(8,817)
1,281,778
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014
Assets
1,375,416
431,474
635,266
Share of investment in joint ventures
5,555
Property, plant and equipment
35,101
69,735
Long-term loans receivable
18,071
21,652
20,111
VAT recoverable
430
Non-current assets
1,880,215
2,342,438
Trading properties
2,979
Trading properties under construction
127,213
Other investments
6,499
9,982
Inventory
615
574
Short-term loans receivable
774
38,961
106,425
Current tax assets
1,307
Cash and cash equivalents
Current assets
270,154
444,707
Total assets
2,150,369
2,787,145
Equity
Share capital
27
Share premium
Translation reserve
Accumulated losses/retained earnings
Equity attributable to owners of the Company
Total equity
Liabilities
Long-term loans and borrowings
28
Deferred tax liabilities
29
102,621
125,260
Deferred income
12,966
22,048
Non-current liabilities
570,684
926,217
Short-term loans and borrowings
Trade and other payables
30
28,216
100,248
Advances from customers
38,007
107
Current tax liabilities
4,067
Current liabilities
297,907
131,449
Total liabilities
868,591
1,057,666
Total equity and liabilities
The consolidated financial statements were approved by the Board of Directors on 16 March 2015.
........................ ...............................
Lev Leviev Mark Groysman
Chairman Director
US$'000
(Loss)/profit for the year
Adjustments for:
Depreciation
1,595
1,874
278,143
103,823
Decrease/(increase) in fair value of properties
15,16,20
94,776
(104,048)
Share of loss in joint ventures
4,451
798
Profit on disposal of investment in subsidiaries/joint ventures
(114)
(32,278)
(27,835)
Profit on sale of property, plant and equipment
(42)
(16)
Goodwill written off
153
Tax (benefit)/expense
(36,048)
31,386
59,849
82,722
Change in trade and other receivables
24,300
(21,011)
Change in inventory
(323)
Change in trading properties and trading properties under construction
(51,073)
12,632
Change in advances and amounts payable to builders of trading properties under construction
(6,213)
Changes in advances from customers
54,744
Change in trade and other payables
(16,003)
(57,336)
Change in VAT recoverable
(201)
Change in deferred income
3,429
Cash generated from operating activities
65,244
20,440
Taxes paid
(750)
(1,345)
Cash flows from investing activities
Net cash inflow from the disposal of subsidiaries
1,400
3,382
Net cash outflow for the acquisition of assets and liabilities
(202,462)
Proceeds from sale of other investments
2,150
Proceeds from sale of investment property
91,329
Proceeds from sale of property, plant and equipment
141
334
Interest received
5,941
3,391
Change in advances and amounts payable to builders
(24,502)
(8,788)
Payments for construction of investment property under development
(54,813)
(32,946)
Payments for the acquisition/renovation of investment property
(43,800)
(43,544)
3,472
(1,781)
Acquisition of property, plant and equipment
(593)
(1,807)
Acquisition of other investments
(1,916)
(10,000)
Taxes paid on disposal of investment property
(4,005)
Payments for loan receivable
(591)
(214)
Proceeds from repayment of loans receivable
576
Net cash used in investing activities
Cash flows from financing activities
Proceeds from loans and borrowings
36,986
306,854
Repayment of loans and borrowings
(26,000)
(34,130)
Repayment of a loan from a related party
(14,354)
Interest paid
(53,169)
(59,396)
Net cash (used in)/from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 31 December
1. INCORPORATION AND PRINCIPAL ACTIVITY
AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 165 Spyrou Araouzou Street, Lordos Waterfront Building, 5th floor, Flat/office 505, 3035 Limassol, Cyprus. The Company is a 64.88% (31/12/2013: 64.88%) subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue, 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.
The consolidated financial statements of the Company as at and for the year ended 31 December 2014 comprise the Company and its subsidiaries (together referred to as the "Group" and individually as "Group entities") and the Group's interest in jointly controlled entities. The principal activity of the Group is real estate investment and development.
The principal activity of the Company is the holding of investments in subsidiaries and joint ventures as presented in note 34 "Group Entities".
2. BASIS OF PREPARATION
Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Companies Law of Cyprus, Cap. 113.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 March 2015.
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis as modified, up to 31 December 2003, by the provisions of IAS 29 "Reporting in Hyperinflationary Economies" which provides for the restatement of non-monetary assets and liabilities to account for the inflation. The historical cost basis is also modified in regard to investment property, investment property under development and other investments which are presented at fair value.
Functional and presentation currency
These consolidated financial statements are presented in United States Dollars which is the Company's functional currency. All financial information presented in United States Dollars has been rounded to the nearest thousand, except when otherwise indicated.
3. Use of judgements and estimates
In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Judgements
Information about judgements made in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:
· Note 17 - classification of the joint arrangements;
· Note 37 - lease classification;
Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2014 is included in the following notes:
· Note 18 - valuation of land and buildings and buildings under construction
· Note 22 - valuation of trading properties
· Note 23 - valuation of trading properties under construction
· Note 13 - provision for tax liabilities
· Note 25 - recoverability of receivables
· Note 31 - utilisation of tax losses
· Note 39 - recognition and measurement of contingencies
Measurement of fair values
A number of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities
The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values and reports directly to the CFO.
The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.
Significant valuation issues are reported to the Group's Audit Committee.
When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
· Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
· Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirely in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
Further information about the assumptions made in measuring fair values is included in the following notes:
· Note 15 - investment property
· Note 16 - investment property under development
· Note 24 - other investments
· Note 27 - share-based payment arrangements
· Note 33 - financial instruments
4. CHANGES IN ACCOUNTING POLICIES
Several new standards and amendments apply for the first time in 2014. However, they do not impact the annual consolidated financial statements of the Group except for the changes below.
The Group has adopted the following amendments to a standard and new interpretation with a date of initial application of 1 January 2014.
· IAS 32 (Amendments) ''Offsetting Financial Assets and Financial Liabilities'' (effective for annual periods beginning on or after 1 January 2014).
The nature and effects of the changes are explained below.
Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities
The Group has applied the amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities for the first time in the current year. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of 'currently has a legally enforceable right of set-off' and 'simultaneous realisation and settlement'.
The amendments have been applied retrospectively.
The Group has assessed whether certain of its financial assets and financial liabilities qualify for offset based on the criteria set out in the amendments and concluded that the application of the amendments has had no impact on the amounts recognised in the Group's consolidated financial statements.
5. SIGNIFICANT ACCOUNTING POLICIES
Except for the changes explained in Note 4, the Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements.
Basis of consolidation
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
Non-controlling interests (NCI)
NCI are measured at their proportionate share of the acquiree's identifiable net assets at the date of acquisition. Subsequently the Group attributes profit or loss and each components of Other Comprehensive Income (OCI) to the NCI even if this results in a deficit balance. Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Loss of control
When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest in the former subsidiary is measured at fair value when control is lost.
Interests in equity-accounted investees
The Group's interests in equity-accounted investees, comprise interests in joint ventures.
A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. Foreign currency differences are generally recognised in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not translated.
Foreign operations
The assets and liabilities of foreign operations are translated into US Dollars at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into US Dollars at the exchange rates at the dates of the transactions or average rate for the year for practical reasons. If the volatility of the exchange rates is high for a given year or period the Group uses the average rate for shorter periods i.e. quarters or months for income and expense items.
Foreign currency differences are recognised in OCI and accumulated in the translation reserve, except to the extent that the translation difference is allocated to NCI.
When a foreign operation is disposed of in its entirety or partially such that control or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to NCI. When the Group disposes of only part of joint venture while retaining joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, then foreign currency differences arising from such item form part of the net investment in a foreign operation. Accordingly, such differences are recognised in OCI, and accumulated in the translation reserve.
The table below shows the exchange rates of Russian Roubles which is the functional currency of the Russian subsidiaries of the Group:
Exchange rate
Russian Roubles
As of: % Change for US$1
31 December 2014 56.2584 71.9
31 December 2013 32.7292 7.8
Average rate during:
Three-month period ended 31 December 2014 47.4243 34.0
Nine-month period ended 30 September 2014 35.3878 11.1
Year ended 31 December 2013 31.8480 2.4
Financial Instruments
The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss and loans and receivables.
The Group classifies non-derivative financial liabilities into the other financial liabilities category.
Non-derivative financial assets and financial liabilities-Recognition and derecognition
The Group initially recognises loans and receivables on the date when they are originated. All other financial assets and financial liabilities are initially recognised on the trade date.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realised the asset and settle the liability simultaneously.
Non-derivative financial assets-measurement
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such on initial recognition. Directly attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income are recognised in profit or loss.
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank, cash in hand and deposits on demand.
Loans and receivables
These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest rate method.
Non derivative financial liabilities-measurement
Non-derivative financial liabilities are initially recognised at fair value less any direct attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method.
Ordinary shares
Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.
Investment Property
Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in profit or loss.
Any gain or loss on disposal of investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss.
When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified accordingly. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in OCI and presented in the revaluation reserve. Any loss is recognised in profit or loss.
When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.
When the Group begins to redevelop an existing property for continued use as investment property, the property remains an investment property, which is measured based on fair value model, and is not reclassified as property plant and equipment during the redevelopment.
Property that is being constructed or developed for future use as investment property is classified as investment property under development and accounted for at fair value until construction or development is complete, at which time it is reclassified as investment property.
Certain development assets within the Group's portfolio that are in very early stages of development process were categorised as "land bank" without ascribing current market value to them. Any value ascribed to such land bank projects other that their cost, would result in a gain or loss to be recognised in profit or loss. This approach was adopted due to abnormal market volatility and will be reviewed in the future once market conditions are more stable.
All costs directly related with the purchase and construction of a property, land lease payments, and all subsequent capital expenditure for the development qualifying as acquisition costs are capitalised.
Capitalisation of financing costs
Financing costs are capitalised if they are directly attributable to the acquisition or production of a qualifying asset. Capitalisation of financing costs commences when the activities to prepare the asset are in process and expenditures and financing costs are being incurred. Capitalisation of financing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. The capitalisation rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate. The capitalised financing cost is limited to the amount of borrowing cost actually incurred.
Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalise borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
All hotels are treated as property, plant and equipment due to the Group's significant influence on their management.
If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment.
Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss.
Subsequent expenditure
Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group.
Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.
Items of property, plant and equipment are depreciated from the date that they are available for use, or in respect of self-constructed assets, from the date that the asset is completed and ready for use.
The annual depreciation rates for the current and comparative periods are as follows:
Buildings 1-2%
Office equipment 10-33⅓%
Motor vehicles 33⅓%
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Intangible assets and goodwill
Goodwill
Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.
Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss is allocated to the carrying amount of the equity-accounted investee as a whole.
Trading Properties
Trading Properties are measured at the lower of cost and net realisable value. Cost includes expenditure incurred in acquiring the properties and bringing them to their existing condition. In the case of constructed trading properties, cost includes an appropriate share of direct and financing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.
Trading properties under construction are defined as projects in which the Group participates as a contractor or as a promoter, and which include construction work with the intention to sell the entire building as a whole or parts thereof. Each project represents one building or a group of buildings.
A group of buildings is considered one project when the buildings at the same building site are being constructed according to one building plan and under one building license, and are offered for sale at the same time. Trading properties include cost of land or of rights to the land that constitutes the relative portion of the area, on which the construction work on projects is performed, plus the cost of the work executed on the projects as well as other costs allocated thereto, less the cumulative amounts recognised in profit or loss as cost of trading properties sold up to the end of the reported period.
Direct costs and expenses are charged to projects on a specific basis, whereas borrowing costs are allocated among the projects based on the relative proportion of the costs. Non-specific borrowing costs are capitalised to such qualifying asset, or portion thereof which was not financed with specific credit, by weighted-average rate of the borrowing cost up to the amount of borrowing cost actually incurred. Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision is set up. Buildings that are under construction are classified as trading properties under construction on the statement of financial position.
Land for future development of trading properties is classified as "Inventory of real estate" as non-current asset when it is not expected to develop and sell the properties within the Group's normal operating cycle. It is presented at the lower of cost or net realisable value.
Income received in advance is classified under non-current and current liabilities as deferred income and comprise rental income received for future periods and amounts received in advance for the sale of trading properties, for which recognition of revenue has not yet commenced.
Impairment
Non-derivative financial assets
Financial assets not classified as at fair value through profit or loss, including an interest in equity-accounted investee are assessed at each reporting date to determine whether there is objective evidence of impairment.
Objective evidence that financial assets are impaired includes:
· default or delinquency by a debtor;
· restructuring of an amount due to the Group on terms that the Group would not consider otherwise;
· indications that a debtor or issuer will enter bankruptcy;
· adverse changes in the payment status of borrowers or issuers;
· the disappearance of an active market for a security; or
· observable date indicating that there is a measureable decrease in expected cash flows from a group of financial assets.
Financial assets measured at amortised cost
The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risks characteristics.
In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends.
An impairment loss is calculated as the difference between an asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an even occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss.
Equity-accounted investees
An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.
Non-financial assets
At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment property, investment property under development, VAT recoverable, inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets.
The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount and recognised in profit or loss.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised.
Assets held for sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for sale or held if it is highly probable that they will be recovered primarily through sale rather than through continuing use.
Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rate basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets or investment property which continue to be measured in accordance with the Group's other accounting policies. Impairment losses on initial classification as held-for sale or held-for distribution and subsequent gains and losses on remeasurement are recognised in profit or loss.
Once classified as held for sale, intangible assets, and property, plant and equipment are no longer amortised or depreciated and any equity-accounted investee is no longer equity accounted.
Employee benefits
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
The grant-date fair value of equity-settled share-based payment options granted to employees is generally recognised as an expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.
The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period during which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date based on the fair value of share appreciation rights. Any changes in the liability are recognised in profit or loss.
Provisions
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.
Sale of trading properties
Revenue from sale of trading properties is recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer.
Construction Management fee
Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.
Investment Property Rental income
Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.
Gross profit is the result of the Group's operations and comprises revenue and other revenue net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.
Finance income and finance costs
Finance income include interest income on funds invested and net gain on financial assets at fair value through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Finance costs include interest expense on borrowings, unwinding of the discount on provisions and deferred consideration, net loss on financial assets at fair value through profit or loss and impairment losses recognised on financial assets.
Borrowing costs are recognised in profit or loss using the effective interest method, net of interest capitalised.
Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.
Income tax
Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in OCI.
Current tax
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.
Deferred tax
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities that affects neither accounting nor taxable profit or loss.
Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves. Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. For this purpose the carrying amount of investment property measured at fair value is presumed to be recovered through sale and the Group has not rebutted this presumption.
.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
The provision for taxation either current or deferred is based on the tax rate applicable to the country of residence of each subsidiary.
Discontinued operations
A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:
· represents a separate major line of business or geographical area of operations;
· is part of a singly co-ordinated plan to dispose of a separate major line of business or geographic are of operations; or
· is a subsidiary acquired exclusively with a view to resale.
Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held for sale.
When an operation is classified as a discontinued operation, the comparative statement of profit or loss and OCI is re-presented as if the operation had been discontinued from the start of the comparative year.
The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to the owners of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to the owners of the Company and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.
Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. All segments results are reviewed regularly by the Group's management to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Adoption of new and revised International Financial Reporting Standards and Interpretations
As from 1 January 2014, the Group adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations.
(ii) Standards and Interpretations adopted by the EU
The following Standards, Amendments to Standards and Interpretations have been issued but are not yet effective for annual periods beginning on 1 January 2014. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these Standards early.
· IAS 19 (Amendments) ''Defined Benefit Plans: Employee Contributions'' (effective for annual periods beginning on or after 1 July 2014).
· Improvements to IFRSs 2010-2012 (effective for annual periods beginning on or after 1 July 2014).
· Improvements to IFRSs 2011-2013 (effective for annual periods beginning on or after 1 July 2014).
(iii) Standards and Interpretations not adopted by the EU
· IFRS 14 ''Regulatory Deferral Accounts'' (effective for annual periods beginning on or after 1 January 2016).
· IFRS 10, IFRS 12 and IAS 28 (Amendments): Investment Entities: Applying the Consolidation Exception (effective for annual periods beginning on or after 1 January 2016).
· IFRS 11 'Accounting for acquisitions of interests in Joint Operations''' (Amendments) (effective for annual periods beginning on or after 1 January 2016).
· IAS 1 (Amendments): Disclosure Initiative (effective for annual periods beginning on or after 1 January 2016).
· IFRS 10 and IAS 28 (Amendments): Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective for annual periods beginning on or after 1 January 2016).
· IAS 27 (Amendments) ''Equity method in separate financial statements'' (effective for annual periods beginning on or after 1 January 2016).
· IAS 16 and IAS 41 (Amendments): ''Bearer plants'' (effective for annual periods beginning on or after 1 January 2016).
· IAS 16 and IAS 38 (Amendments) ''Clarification of acceptable methods of depreciation and amortisation'' (effective for annual periods beginning on or after 1 January 2016).
· Annual Improvements to IFRSs 2012-2014 Cycle (effective the latest as from the commencement date of its first annual period beginning on or after 1 January 2016).
· IFRS 15 ''Revenue from contracts with customers'' (effective for annual periods beginning on or after 1 January 2017).
· IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January 2018).
The Board of Directors expects that the adoption of the above financial reporting standards in future periods will not have a significant effect on the financial statements of the Company except of:
· The adoption of IFRS 15 which could affect the consolidated financial statements.
The extent of the impact has not been determined.
6. OPERATING SEGMENT
The Group has five reportable segments, as described below, which are the Group's strategic business units. The strategic business units offer different types of real estate products and services and are managed separately because they require different marketing strategies as they address different types of clients. For each strategic business unit the Group's management reviews internal management reports on at least monthly basis. The following summary describes the operation in each of the Group's reportable segments.
· Development Projects - Commercial projects: Include construction of property for future lease.
· Development Projects - Residential projects: Include construction and selling of residential properties.
· Asset Management: Includes the operation of investment property for lease.
· Hotel Operation: Includes the operation of Hotels
· Other - Land bank: Includes the investment and holding of property for future development.
Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal managementreports that are reviewed by the Group's management team. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm's length basis.
Development projects
Asset management
Hotel Operation
Other - land bank
Commercial projects
Residential projects
External revenues
117
54,494
2,512
3,049
117,348
111,942
15,288
17,749
8,823
15,027
Inter-segment revenue
410
469
489
Interest revenue
1,278
70
397
762
722
4,603
4,729
5,857
Interest expense
(44)
(45)
(60)
(56,428)
(65,088)
(153)
(1,402)
(4,153)
(166)
(60,838)
(66,902)
(17)
(49)
(7)
(269)
(438)
(1,149)
(1,286)
(128)
(144)
(1,595)
(1,892)
Reportable segment (loss)/profit before tax
(4,676)
25,662
2,236
(2,113)
(220,037)
6,418
8,627
3,350
(2,730)
(14,338)
(216,580)
18,979
Other material
non-cash items:
Net valuation (loss)/gains on properties
(129,467)
82,012
123,278
45,415
(79,695)
(21,193)
Reportable segment assets
208,923
318,962
175,444
178,199
1,362,157
1,582,780
27,471
53,938
250,735
390,957
2,024,730
2,524,836
Reportable segment liabilities
4,607
38,348
808,615
1,011,865
4,163
852,893
1,016,028
Note:
Development projects: investment projects under construction, including construction of residential properties.
Asset management: yielding property management (all commercial properties).
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items.
Revenues
Total revenue for reportable segments
144,518
202,750
Elimination of inter-segment revenue
(430)
(489)
Consolidated revenue
Profit or loss
Total profit or loss for reportable segments
Other profit or loss
(7,650
(19,176)
Profit on disposal of investment in joint venture/subsidiaries
Valuation (loss)/gain on properties
Consolidated (loss)/profit before tax
Total assets for reportable segments
Other unallocated amounts
125,639
262,309
Consolidated total assets
Total liabilities for reportable segments
15,698
41,638
Consolidated total liabilities
Reportable segment totals
Adjustments
Consolidated totals
Other material items 2014
5,198
(55,640)
Other material items 2013
15,104
6,525
(60,377)
Net valuation gain on properties
Geographical segments
Geographically the Group operates only in Russia and has no significant revenue or assets in other countries or geographical areas. Therefore no geographical segment reporting is presented.
Major customer
There was no concentration of revenue from any single customer in any of the segments.
7. REVENUE
Investment property rental income
126,152
126,965
Sales of trading properties (note 22)
2,411
57,540
15,287
17,738
Construction consulting/management fees
238
8. OTHER INCOME
Other income consists of:
Penalties charged to tenants
1,219
2,198
Reimbursement of depositary fees
1,500
57
Sundries
746
4,154
9. OPERATING EXPENSES
Maintenance, utility and security expenses
24,140
25,422
Agency and brokerage fees
825
4,552
Advertising expenses
4,462
4,186
Salaries and wages
17,553
19,398
Consultancy fees
994
1,516
1,412
1,721
Insurance
717
799
Rent
2,408
3,086
Property and other taxes
9,899
15,750
Other operating expenses
100
87
62,510
76,517
10. ADMINISTRATIVE EXPENSES
1,835
2,149
Legal fees
1,273
998
Auditors' remuneration
784
805
Valuation expenses
174
Directors' remuneration
2,024
1,497
183
155
247
Provision for Doubtful Debts
4,568
(926)
Donations
4,834
4,527
Other administrative expense
1,995
2,326
22,303
16,911
11. OTHER EXPENSES
Prior years' VAT non recoverable (note 21)
600
1,564
Compensation paid for fire damages
811
Legal claim
1,453
4,720
3,105
6,773
5,480
12. FINANCE INCOME AND FINANCE COSTS
Interest income
5,858
Loans payable written off
15,103
Interest expense on loans and borrowings
(4)
(156)
Interest expense on bank loans
(55,636)
(60,221)
Net change in fair value of financial assets
(3,263)
(18)
Translation reserve reclassified upon disposal of joint venture (note 35)
(30,288)
Other finance costs
(1,936)
(6,508)
Net foreign exchange loss
(224,794)
(28,941)
The net foreign exchange loss recognised during 2014 is a result of the strengthening of the US Dollar to the Russian Rouble by 72%, during 2014. The recognised loss is mainly attributable to the US Dollar denominated loans held by Russian subsidiaries or branches where the functional currency is the Russian Rouble.
Subject to the provisions of IAS23 "Borrowing costs" in 2014 the Group did not capitalise any amount (2013: Nil) of financing costs to the projects that are in construction phase.
Loans payable written off during 2013 represent short term loans and borrowings of a Group's subsidiary, which were written off, during the first quarter of 2013 based on the understanding that neither legal nor implied obligations are no longer valid regarding these liabilities.
13. TAX EXPENSE
Current tax expense
Current year
508
8,666
Adjustment for prior years
245
8,911
Deferred tax (benefit)/expense
Origination and reversal of temporary differences
(36,663)
22,475
Total tax (benefit)/expense
The provision for taxation either current or deferred is based on the tax rates applicable to the country of residence of each Group entity. Cypriot entities are subject to 12.5% corporate rate whereas Russian subsidiaries are subject to 20% corporate rate.
%
(Loss)/profit for the year after tax
(Loss)/profit before tax
Tax using the Company's domestic tax rate
(12.5)
(40,418)
12.5
16,916
Effect of tax rates in foreign jurisdictions
(8.6)
(27,691)
7.5
10,246
Tax exempt income
(4.1)
(13,235)
(6.3)
(8,570)
Non-deductible expenses
5.9
18,968
8.2
11,047
Change in estimates related to prior years
241
Current year losses for which no deferred tax asset recognised
8.1
26,221
1.1
1,506
(11.2)
23.2
The current tax assets of US$1,307 thousand as at 31 December 2014, represents the net amount of income tax overpayment in respect of current and prior periods. The current tax liabilities of US$4,067 thousand as at 31 December 2013, represents the net amount of income tax payable in respect of year ended 31 December 2013 and prior periods net of payments made up to the year end.
14. EARNINGS PER SHARE
Basic earnings per share
(Loss)/profit attributable to ordinary shareholders
Weighted average number of ordinary shares
Shares in thousands
Weighted average number of shares
1,047,694
Earnings per share (cent)
Diluted earnings per share are not presented as the assumed conversion of the employee share options outstanding would have an anti-dilutive effect i.e. increase in earnings per share.
15. INVESTMENT PROPERTY
Reconciliation of carrying amount
Balance 1 January
1,292,300
Reclassification from investment property under development
1,852
Reclassification to trading properties (note 22)
(432)
Acquisitions
388,254
Disposal of investment property
(61,397)
Renovations/additional cost
6,814
13,186
Fair value adjustment
42,455
Effect of movement in foreign exchange rates
(351,548)
(66,850)
Balance 31 December
The investment property was revalued by independent appraisers on 31 December 2014. The cumulative adjustments, for all projects, are shown in line "Fair value adjustment" in the table above.
The decrease due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 72%, during 2014. The fair value adjustment gain is mostly related to this rouble weakening.
Acquisitions during 2013 represent the effect of the acquisition of the 100% of the previously 50% owned joint venture Krown Investments LLC, which was thereafter treated as a subsidiary.
The disposal of investment property during 2013 represents Building 1 of the Ozerkovskaya (Aquamarine) phase III office complex in Moscow, which was disposed on 20 December 2013. Under the transaction, Krown Investments LLC, the subsidiary holding the rights to Ozerkovskaya (Aquamarine) phase III, sold premises of the first building in the Complex and part of underground premises with gross area of 10,985.8 sq.m. a terrace of 418.9 sq.m. and approximately a 15.8% share in the title to common areas of the Complex, which total 3,728.6 sq.m. (total transacted area corresponds to approximately 11,994 sq.m.), to a Russian state controlled corporation. The consideration received amounted to Russian rouble equivalent of US$91.5 million and applicable Russian VAT resulting in a profit of US$27.8 million before taxes.
b) Measurement of fair value
Fair value hierarchy
The fair value of investment property was determined by external, registered independent property valuers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The independent valuers provide the fair value of the Group's investment property portfolio every six months. The same applies for investment property under development in note 16 below.
The fair value measurement for investment property of US$1,375,416 thousand (2013: US$1,609,800 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
Level 3 fair value
The table presented in reconciliation of carrying amount in 15(a) above shows the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties of the Group, are categorised as level 3.
Valuation technique and significant unobservable inputs
The following table shows the valuation technique used in measuring the fair value of investment property, as well as the significant unobservable inputs used.
Valuation technique
Significant unobservable inputs
Inter-relationship between key unobservable inputs and fair value measurement
Discounted cash flows: The valuation model considers the present value of net cash flows to be generated from each property, taking into account rental rates and expected rental growth rate, occupancy rate and void periods together reflected in vacancy rates, construction cost, opening and completion dates, lease incentive costs such rent free periods, taxes* and other costs not paid by tenants. The expected net cash flows are discounted using the risk-adjusted discount rates plus the final year stream is discounted with an all-risk Yield. Among other factors, discount rate estimation considers type of property offered (retail, commercial, office) quality of building and its location, tenant credit quality and lease terms.
· Average Rental rates per sq.m.: Office class A $650, class B $250-$350, Retail $185-$8,790
· Expected market rental growth office 0-3% average, retail 0-2.5% average
· Vacancy rate (class A 0-2% class B 4-13% )
· Risk-adjusted discount rates (14.5%-19%)
· All-Risk Yield 10%-15.5%
The estimated fair value would increase/(decrease) if:
· Average rental rates were higher/(lower)
· Expected market rental growth were higher/(lower)
· Void periods were shorter/(longer)
· The vacancy rates were lower/(higher)
· The risk-adjusted discount rate were lower (higher)
· All-risk yields were lower/(higher)
Investment properties at fair value are categorised in the following:
Retail properties
Office space properties
375,416
Fair value sensitivity Analysis
Presented below is the effect on the fair value of the main investment property project, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.
AFI Mall City
Capitalization Rates
Increase of 1 %
Rate used in fair value calculation as at 31/12/2014
Decrease of 1%
Fair value (US$ '000)
949,424
1,060,691
Average rental rates per sq.m
Decrease of 5%
US$1,147 sq.m.
Increase of 5%
966,543
1,033,457
Decrease of 10%
Increase of 10%
933,085
1,066,915
Decrease of 2%
Increase of 2%
982,016
1,022,800
16. INVESTMENT PROPERTY UNDER DEVELOPMENT
567,737
Construction costs
83,820
17,050
Disposal
(1,400)
Acquisition
846
Transfer to investment property
(1,852)
(196,666)
63,779
Effect of movements in foreign exchange rates
(89,546)
(12,294)
During the period the Company disposed its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project, of a book value of US$1,400 thousand. For further details refer to note 35.
The investment property under development was revalued by independent appraisers on 31 December 2014. The cumulative adjustments, for all projects, are shown in line "Fair value adjustment" in the table above. The decrease due to the effect of the foreign exchange rates is a result of the strengthening of the US Dollar to the Russian Rouble by 72%, during 2014.
The Fair value adjustment loss is a result of the overall economic deterioration of the Russian economy which caused an increase of interest rates by the Central Bank of Russia, decrease in the Russian Rouble value which affected the valuation parameters and assumptions used in the valuation of the investment property under development.
In November 2013 the Company's subsidiary MKPK JSC and the Moscow city authorities signed an addendum to the land lease agreement for "Paveletskaya Phase II" project, amending the permitted use of land from industrial to the construction of commercial and residential premises. The addendum is in line with the previous decisions of the Moscow city authorities on development rights of the Company in this project. However the addendum provides the level of certainty required to change the fair value of the project to market value. The market value of the project determined by Cushman & Wakefield, the Company's independent appraisers, was US$92.6 million, as of 30 September 2013, as opposed to book value of US$11.6 million. The resulting US$81 million gross valuation gain (US$64.8 million net of taxation) was recognised in profit or loss on 30 September 2013.
According to the article dated 29 October 2013 and published on the official web-site of the Moscow Government, the Construction Department of Moscow Government has made decision to start an active phase of redevelopment at Tverskaya Zastava Square in 2014 (and the first stage of redevelopment will focus on construction of an additional overhead road across the railway lines), whereas the date of completion of these works remains unclear, which will incur significant delay and, thus, pose high uncertainty with the timeline of the subject Plaza IIa project. Based on these facts, the Company recognised a decrease in the fair value of the property of US$13.3 million. The valuation was also determined by the Company's independent appraisers and the fair value loss was recorded in profit or loss on 30 September 2013.
The fair value measurement for investment property under development of US$431,474 thousand (2013: US$633,213 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
The table presented above is the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties under development of the Group, are categorised as level 3.
The valuation technique used in measuring the fair value of investment property under development, the significant unobservable inputs used, as well as the Inter-relationship between key unobservable inputs and fair value measurement are discussed in note 15 above. In addition, the following inputs for investment property under development.
Geographical
Fair
Discount
Rate of return for
location
value
rate
representative year
20-29
9.5-13
17. SHARE OF INVESTMENT IN JOINT VENTURES
82,414
Share of loss (net of share of tax)
(4,091)
Acquisition of 100% of assets and liabilities of joint venture
(75,599)
Effect of movements in exchange rates
(1,464)
(462)
The Group's joint ventures comprise the following:
50% interest in Nouana Limited with its subsidiary Tirel LLC, owner of a hotel in Kislovodsk. 50% interest in Craespon Management Ltd with its subsidiary Sanatorium Plaza LLC that operates the aforementioned hotel.
During the period the Group's joint ventures incurred significant losses, as a result the Group's share of loss has exceeded its interest in these joint ventures. Therefore the Group discontinued recognising its share of further losses. The Group will resume recognising its share of future profits from the joint ventures only after its share of the future profits equals the share of losses not recognised.
During 2013 the Group owned a 50% interest in Westec Four Winds Ltd and its subsidiary Dulverton Ltd, owner of investment property in Moscow, which was disposed early January 2013, see note 35.
During 2013 the Group also owned a 50% interest in Krown Investments LLC, owner of investment and trading properties in Moscow. On 12 February 2013 the Group acquired the remaining 50% shareholding, deemed as acquisition of assets and liabilities.
The following table summarises the financial information of the joint ventures as included in their own financial statement, adjusted for fair value adjustments at acquisition. The table also reconciles the summarised financial information to the Group's interest in joint ventures:
Percentage ownership interest
50%
Non-Current assets
18,365
31,699
11,622
9,488
Non-Current liabilities
(39,010)
(36,191)
(1,843)
(11,324)
Net liabilities (100%)
(10,866)
(6,328)
Group's share of net liabilities (50%)
(5,433)
(3,164)
Fair value adjustments at acquisition
5,072
8,719
Interest in joint ventures
(361)
Restriction of share of loss
361
Carrying amount of interest in joint ventures
39,126
28,161
(48,030)
29,758)
Loss and total comprehensive income (100%)
(8,904)
(1,597)
Group's share of profit and total comprehensive income (50%)
(4,452)
Dividends received by the Group
18. PROPERTY, PLANT AND EQUIPMENT
Buildings
under
construction
Land &
Office Equipment
Motor
Vehicles
Cost
14,400
56,709
3,847
1,710
76,666
Additions
83
240
270
593
Disposals
(439)
(177)
(76)
(692)
(10,158)
(24,209)
(1,342)
(780)
(36,489)
4,242
2,568
1,124
40,078
Accumulated depreciation
2,617
2,908
1,406
6,931
Charge for the year
1,114
354
127
(355)
(170)
(69)
(594)
(1,000)
(610)
(2,955)
2,031
2,092
854
4,977
Carrying amount
At 31 December 2014
30,113
476
16,527
60,605
3,942
1,944
83,018
1,267
258
123
1,807
(8)
(669)
(9)
(197)
(883)
(2,278)
(4,494)
(344)
(160)
(7,276)
2,221
2,625
1,617
6,463
1,210
534
130
(666)
(1)
(205)
(872)
(148)
(250)
(136)
(534)
At 31 December 2013
54,092
939
304
19. LOANS RECEIVABLE
Long-term loans
Loans to joint ventures (note 40)
17,962
21,438
Loans to non-related companies
109
214
Short-term loans
Terms and loan repayment schedule
Terms and conditions of outstanding loans were as follows:
Nominal
Year of
interest rate
maturity
Unsecured loans to joint ventures
11.5%
12,134
11,787
14.4%
5,828
9,651
Unsecured loans to non-related companies
89
8.8%
34
740
0.1%
on demand
18,072
22,426
20. INVENTORY OF REAL ESTATE
As previously announced, in August 2012 AFI Development wrote-off its rights to the project "Botanic Gardens" following initiation of bankruptcy proceedings against the "main investor" under the investment contract, Novoe Koltso Moskvy OJSC ("NKM"), while continuing its efforts to secure development rights to the project.
On 5 February and 21 February 2013, the Company reported that, as a result of negotiations with the Moscow city authorities, the Company's development rights to the project have been recognised through an addendum to the investment contract for the project. According to this addendum, NKM shall not have any claims to the investments made by AFI Development in the Botanic Garden project and the Group's subsidiary, Nordservice LLC, became the only investor under the investment contract.
In May 2014, the Company made further progress towards restoring the Botanic Garden project on its balance sheet. As a creditor of NKM and a participant in its bankruptcy proceedings, Nordservice LLC purchased additional rights of claim against NKM for US$5.6 million and up to 30 September 2014 total costs amounted to US$17.5 million which were also impaired to profit or loss.
On 18 December 2014, all risks related to the bankruptcy of NKM have been removed and the Company has restored the project in its balance sheet. The inventory of real estate was revalued by independent appraisers on 31 December 2014 at US$20 million and up to year end additional costs of approximately US$10 million were incurred by Nordservice LLC. The net effect was the recognition of an impairment loss of $9 million in profit or loss for the year.
21. VAT RECOVERABLE
Represents VAT paid on construction costs and expenses which according to the Russian VAT law can be recovered upon completion of the construction. Part of this VAT is expected to be recovered after more than 12 months from the balance sheet date. Due to the uncertainties in the Russian tax and VAT law, the management has assessed the recoverability of this VAT and has provided for any amounts that their recoverability was deemed doubtful or questionable (see note 11). Under Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. The Group was successful in recovering VAT during the year, and it is estimated that part of the VAT recoverable as at the year-end will be recovered within the next 12 months, which is classified as trade and other receivables, note 25.
22. TRADING PROPERTIES
3,597
6,944
Reclassification from investment property (note 15)
432
Reclassification from trading properties under construction
29,772
(2,230)
(1,281)
Trading properties comprise unsold apartments and parking spaces. During the period the Group has sold a number of the remaining apartments and parking places and their cost was transferred to profit or loss.
The reclassification from trading properties under construction during 2013 represents the completion of the construction of the 643 parking places units which were disposed upon transferring of the rights to the buyer VTB Bank according to the agreement described below:
In November 2012 Bellgate Constructions Limited ("Bellgate"), the Company's subsidiary owning and operating AFIMALL City, entered into an agreement to dispose approximately 643 parking spaces to VTB Bank JSC. The transaction was structured in two stages. The first stage entailed a sale-purchase transaction between Bellgate and VTB Bank JSC of 21,354 sq.m. of parking space. During the second stage 9,247 sq.m. owned (at completion) by VTB Bank JSC will be exchanged for 7,847 sq. m. owned by Bellgate. The first stage of the transaction was completed on 3 June 2013 with the transfer of the rights to the buyer, who became liable for the risks associated with ownership and can utilize the space and is free to sell to another party and therefore revenue of US$54,492 thousand and a corresponding cost of the disposed properties of US$29,772 thousand were recognised in the income statement during second quarter of 2013.
23. TRADING PROPERTIES UNDER CONSTRUCTION
141,787
Transfer to trading properties
(29,772)
35,874
17,805
(30,051)
(2,607)
Trading properties under construction comprise "Odinburg" project which involves primarily the construction of residential properties.
The 643 parking places underneath AFIMALL City were completed during the year 2013, reclassified to trading properties and disposed according to the agreement with VTB Bank JSC described in note 22 above.
24. OTHER INVESTMENTS
The amount represents investment in marketable interest bearing debt securities classified at fair value through profit or loss.
25. TRADE AND OTHER RECEIVABLES
Advances to builders
20,200
40,241
Amounts receivable from related parties (note 40)
387
12,999
Trade receivables net
6,014
9,659
Other receivables
3,540
26,515
VAT recoverable (note 21)
7,141
15,711
Tax receivable
1,679
1,300
Trade receivables are presented net of an accumulated provision for doubtful debts of US$12,753 thousand (2013: US$12,658 thousand).
26. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of:
Cash at banks
86,504
193,027
Cash in hand
252
303
27. SHARE CAPITAL AND RESERVES
Authorised
2,000,000,000 shares of US$0.001 each
2,000
Issued and fully paid
523,847,027 A ordinary shares of US$0.001 each
523,847,027 B ordinary shares of US$0.001 each
524
There were no changes to the authorised or the issued share capital of the Company during the year ended 31 December 2014.
It represents the share premium on the issue of shares on 31 December 2006 for the conversion of the shareholders' loans to capital US$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524 thousand was capitalised as a result of a bonus issue.
Employee Share option plan
The Company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will be required for the grant of the options. In any 10 year period not more than 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan.
As of 31 December 2014 the following options were outstanding.
· During 2007 and 2008 options over GDRs with an exercise price of US$7 which have already vested, one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remained in employment until the vesting date. The vesting was not subject to any performance conditions. On 31 December 2014 1,017,240 options, 0.1% of the issued share capital, were outstanding which have already vested and have a contractual life of ten years from the date of grant.
· On 21 May 2012, the Board of Directors approved the grant of additional options to Company's employees. Options over 16,763,104 B shares, 1.6% of the issued share capital, were granted with an exercise price equal to US$0.7208, vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. Their contractual life is five years from the date of grant. During 2013 1,571,541 options were cancelled, 15,191,563 valid options remain out of which 5,063,854 options have already vested.
· On 22 November 2012, the Board of Directors approved the grant of additional options to the Company's executive chairman. Options over 31,430,822 B shares, 3% of the issued share capital, were granted with an exercise price equal to US$0.5667, vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. Their contractual life is five years from the date of grant. 10,476,971 options have vested during the period.
If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may satisfy, (with the consent of the participant), an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs.
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign exchange differences on loans designated as loans to an investee company which are accounted for as part of the investor's investment (IAS21.15) as their repayment is not planned or likely to occur in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve.
Retained earnings
The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the year ended 31 December 2014.
28. LOANS AND BORROWINGS
Secured bank loans
231,297
26,367
Unsecured loans from other non-related companies
660
The outstanding loans on 31 December 2014 comprise of two loans as follows:
VTB loan to Bellgate
A secured loan from VTB Bank JSC ("the Bank") signed on 22 June 2012 by one of the Group's subsidiary, Bellgate Construction Ltd ("Bellgate"). On 29 June 2012 a drawdown of the first tranche of a new loan facility agreement was effected. On 3 August 2012 a drawdown of the second tranche, of US$69,386 thousand (RUR 2,252 million). During the year the Group received the third and the fourth tranche, of total approx. US$86,854 million (RUR 2,633 million). This new loan facility agreement offers a credit line totalling RUR 21 billion, which can be drawn down in 5 tranches, each with a designated purpose: the majority of the funds are designated to refinance existing loans previously issued by the Bank. The remaining funds are designated for the refinancing of construction costs related to the AFIMALL City parking and for the financing of the outstanding payments constituting part of the consideration for the acquisition of the parking.
The Company has discretion over the currency of each tranche, which can be drawn down either in US dollars or in Russian roubles. The loan facility has differentiated interest rates which are currency dependent: 9.5% for loans drawn down in Russian roubles and 3 months LIBOR plus 6.7% for loans drawn down in US dollars. The interest on the loans is payable on a quarterly basis, throughout the term of the credit line. Bellgate has undertaken to make equal quarterly payments of US$6.5 million from 2014 to 2016, on account of the principal of the loans, while it has been agreed that the remainder of the loan will mature in April 2018.
The terms of the loan facility agreement are substantially similar to those of the loan facility agreement entered into in February 2012 with the Bank in relation to the financing of the acquisition of the AFIMALL City parking. However, certain conditions of the new loan facility will differ from the aforementioned loan, including the following:
a) The guarantee of AFI Development Plc over the obligations of Bellgate under the loan facility agreement will be in the amount of US$1 million, the nominal value of Bellgate's shares;
b) Additional mortgage over the premises of "Aquamarine" Hotel will be registered in favour of the Bank. This shall be removed in the case that Bellgate redeems US$20 million of principal;
c) Additional guarantee will be provided to the Bank by Semprex LLC, a Russian company which is an indirect subsidiary of AFI Development Plc, and owner of the "Aquamarine" Hotel. This shall be removed in the case that Bellgate redeems US$20 million of principal;
d) The turnover covenant has been changed from monthly bank accounts turnovers of not less than RUR 200 million to quarterly revenues (including VAT) exceeding agreed thresholds, determined as amounts gradually increasing from RUR 651 million for Q3 2012 to the amount of RUR1,139 million for Q1 2018. The penalty for not meeting the covenant is changed from 1% additional interest for the next month to 0.5% additional interest for the next quarter.
The loan facility agreement contains other generally acceptable terms, such as the borrower undertaking to maintain the aggregate value of the pledged assets, securing the loan facility, providing the lender with periodic reporting and similar common conditions.
On 17 August 2013 Bellgate Constructions Limited signed an addendum to the current Loan Facility Agreement with the Bank. According to the new terms under the above mentioned addendum the applicable interest rate to the US Dollar denominated loan facility has been decreased from 3-month LIBOR plus 6.7% p.a. to 3-month LIBOR plus 5.02% p.a. The change was effective upon the registration date of the mortgage agreements, on 3 September 2013.
VTB Loan to Krown
On 25 January 2013 Krown Investments LLC ("Krown"), a 100% subsidiary, acquired a new secured loan from VTB Bank JSC ("the Bank") for refinancing the repayment of borrowings due to related parties. This loan agreement offers a credit line of US$220 million, which was drawn down during the first quarter of 2013. The agreed interest is three-month LIBOR plus 5.7% p.a., payable every quarter. The loan repayment date is in 731 days from the date of signing the loan agreement. Securities provided to the Bank are on the 100% of the shares of Krown and on properties/buildings of Aquamarine Phase III. A decrease in the market value of the pledged buildings by more than 15% will enable the bank to demand repayment of the loan before the agreed maturity date. In case of disposal of the pledged building, at least 70% of sale proceeds should be directed to the Bank for the repayment of the loan. An amount of US$15 million was repaid during 2013 out of the proceeds from sale of Building 1 of the Ozerkovskaya (Aquamarine) phase III as disclosed in note 15. . The outstanding loan amount as at 31 December 2014 amounted to US$205 million, including interest, which was reclassified as current liability as the repayment date falls within the next twelve months, 26 January 2015. After the balance sheet date the Company has refinanced the loan, see note 41 for more information.
Terms and debt repayment schedule
Secured loan from VTB Bank to Bellgate
184,711
290,529
3m USD LIBOR+
5.02%
296,386
309,386
Secured loan from VTB Bank to Krown
5.7%
2015
205,297
205,361
Other
3-12%
The loans and borrowings are payable as follows:
More than five years
As of 31 December 2014 the Group is in compliance with all loan covenants.
29. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax (assets) and liabilities are attributable to the following:
157,429
138,666
25,065
50,427
(1,028)
(4,151)
1,507
(348)
(420)
(3,341)
(5,204)
(4,177)
(372)
(5)
2,869
Other items
(21)
Tax losses carried forward
(74,330)
(53,301)
Deferred tax liability
30. TRADE AND OTHER PAYABLES
Trade payables
8,654
11,175
Payables to related parties (note 40)
2,264
4,088
Amount payable to builders
7,626
9,556
VAT and other taxes payable
7,373
28,260
Amount payable for the acquisition of properties
39,967
Other payables
2,299
7,202
The above are payable within one year and bear no interest.
Payables to related parties
Include an amount of US$1,465 thousand (31/12/13: US$3,282 thousand) payable to Danya Cebus Rus LLC, related party of the Group, for contracts signed in relation to the construction of Group's projects.
Represented the third instalment of an amount payable to the City of Moscow, for the acquisition of the parking area under the AFIMALL City. The amount was payable in three yearly installments starting from February 2012 and with the last falling due in February 2014. In February 2014 the company paid the third and last installment of RUR 1,333 million.
31. ADVANCES FROM CUSTOMERS
Represent advances received from customers for the sale of residential properties at "Odinburg" project.
32. DEFERRED INCOME
Represents rental income received in advance, which corresponds to periods after the reporting date.
33. FINANCIAL INSTRUMENTS - FAIR VALUES AND RISK MANAGEMENT
Accounting classifications and fair values
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels and the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
Fair value
Loans
Receivable
Trade and
other
receivables
investments,
Including derivatives
Cash
and cash
equivalents
receivable
Level 1
Level 2
Level 3
31 December 2014
Financial assets measured at fair value
Investment in listed debt securities
Financial assets not measured at fair value
Loans receivable
30,141
134,969
31 December 2013
89,414
305,170
Interest bearing
loans and borrowings
payables
Interest bearing loans and borrowings
Financial liabilities not measured at fair value
(455,097)
(231,684)
(686,781)
(735,004)
(20,843)
(707,624)
(778,909)
(27,027)
(805,936)
(834,466)
(71,988)
(877,924)
Financial risk management
The Group has exposure to the following risks arising from financial instruments:
· credit risk
· liquidity risk
· market risk
· operational risk
The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework and is responsible for developing and monitoring the Group's risk management policies.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Audit Committee overseas how management monitors compliance with the Group's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers and cash deposited with banks.
The carrying amount of financial assets represents the maximum credit exposure.
Financial assets which are potentially subject to credit risk consist principally of trade and other receivables as well as credit exposures with respect to rental customers and buyers of residential properties including outstanding receivables. The carrying amount of trade and other receivable represents the maximum amount exposed to credit risk. There is no concentration of credit risk to any single customer in any of the Group's segments. Geographically there is no concentration of credit risk. The Group has policies in place to ensure that, where possible rental contracts are made with customers with an appropriate credit history.
At 31 December 2014, the ageing of trade and other receivable that were not impaired was as follows:
Neither past due nor impaired
3,005
3,071
Past due 1-30 days
1,190
3,689
Past due 31-90 days
2,529
6,914
Past due 91-120 days
23,416
75,738
30,140
89,412
Management believes that the unimpaired amounts that are past due by more than 30 days are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk, including underlying customers'
The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows:
Individual impairments
Collective impairments
440
13,144
Impairment loss recognised
(341)
894
Amounts written off
(1,479)
99
12,559
(26)
4,595
Exchange difference effect
(19)
(4,455)
12,699
Credit risk arises from cash and cash equivalents. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored.
The Group has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group.
The Group limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2014, there were two outstanding guarantees: one of AFI Development Plc for the amount of US$1 million in favour of VTB Bank under a loan facility agreement of Bellgate Construction Limited and another one of AFI Development Plc for the amount of US$205 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (project Aquamarine III).
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.
The Group's liquidity position is monitored by the management which take necessary actions if required. The Group structures its assets and liabilities in such a way that liquidity risk is minimised.
The Group maintains the following lines of credit as at 31 December 2014:
· A secure bank loan facility from VTB Bank JSC for RUR 21billion, with the majority of the funds designated for refinancing existing loans and the rest for the financing of the acquisition and construction AFIMALL City parking. The line was fully used up to the end of February 2014.
· A secure bank loan facility from VTB Bank JSC for US$205 million, acquired for refinancing the construction costs for Ozerkovskaya III project.
The following are the remaining contractual maturities of financial liabilities at the reporting date, including estimated interest payments and excluding the impact of netting agreements:
Carrying
Contractual
6 months
6-12
Amount
Cash flow
or less
months
1-2 years
2-5 years
686,394
(785,535)
(235,311)
(28,991)
(56,541)
(464,692)
Unsecured loans
(401)
20,843
805,276
(981,298)
(40,277)
(39,813)
(272,115)
(629,093)
(677)
71,988
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
The Group is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of Group entities, primarily the United States Dollars and Russian Roubles. The currencies in which these transactions primarily are denominated are Russian Roubles, United States Dollars, Euro and Ukrainian Hryvnia.
Sensitivity analysis
The following shows the magnitude of changes in respect of a number of major factors influencing the Group's profit before taxes. The assessment has been made on the year-end figures.
A 10% strengthening of the United States Dollar against the following currencies at 31 December 2014 would have increased/(decreased) equity and profit for the year by the amounts shown below.
This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2013.
Profit for
the year
(6,588)
(45,125)
Ukrainian Hryvnia
(3,492)
Euro
(118)
(8,460)
(51,049)
(2,297)
142
A 10% weakening of the United States Dollar against the above currencies at 31 December 2014 would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
Profile
At the reporting date the interest rate profile of the Group's interest-bearing financial instruments is as follows:
Fixed rate instruments
Financial assets
24,482
32,194
Financial liabilities
(177,843)
(291,189)
(153,361)
(258,995)
Variable rate instruments
(508,934)
(514,747)
(514,713)
Cash flow sensitivity analysis for variable rate instruments
An increase of 100 basis points in interest rates at the reporting date would have increased/ (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2013.
(5,014)
(5,147)
A decrease of 100 basis points in interest rates at the reporting date would have the equal but opposite effect on the above instruments to the amounts shown above, on the basis that all other variables remain constant.
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.
The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas:
· requirements for appropriate segregation of duties, including the independent authorisation of transactions
· requirements for the reconciliation and monitoring of transactions
· compliance with regulatory and other legal requirements
· documentation of controls and procedures
· requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified
· requirements for the reporting of operational losses and proposed remedial action
· development of contingency plans
· training and professional development
· ethical and business standards
· risk mitigation, including insurance where this is effective
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Group.
Capital management
The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
There were no changes in the Group's approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
The Company is committed to delivering the highest standards in boardroom practice and financial transparency through:
· clear and open communication with investors;
· maintaining accurate quarterly financial records which transparently and honestly reflect the financial position of its business; and
· endeavouring to maximise shareholder returns.
A full programme of investor relations activity ensures appropriate contact with institutional and private shareholders, with regular meetings, presentations and disclosure of important information. Great care is taken to provide suitably detailed information on the Group's activities and results to enable various stakeholders to understand the performance and prospects of the Group.
Russian Business Environment
The Group's operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.
The recent conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rubble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
The consolidated financial statements reflect management's assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management's assessment.
Changes in property tax law
Russian Federal Law No. 307-FZ dated 2 November 2013 introduced changes in property tax calculation for office and retail premises and properties owned by foreign legal entities that do not operate in Russia via representative offices. The law entered into force on 1 January 2014. Prior to 2014, the property tax was calculated at 2.2% of the property book value posted on the owner's balance sheet. From 2014 the cadastral values for given premises (excluding underlying land) will be set as the basis for property tax payments. The tax rate will be determined by local (regional) authorities under Federal laws. The Moscow Government announced final tax schedule for properties in Moscow as follows: 0.9% (2014), 1.2% (2015), 1.5% (2016), 1.8% (2017), 2.0% (2018).
34. GROUP ENTITIES
Ultimate controlling party: Lev Leviev Israel
Ultimate holding company: Africa Israel Investments Limited Israel
Holding company: Africa Israel Investments Limited Israel
Significant Subsidiaries Ownership interest Country of incorporation
2014 2013
1. OOO AFI RUS 100 100 Russian Federation
2. OOO Avtostoyanka Tverskaya Zastava 100 100 Russian Federation
3. OOO Krown Investments 100 100 Russian Federation
4. OAO Moskovskiy Kartonazhno-poligraphicheskiy Kombinat (MKPK) 99.17 99.17 Russian Federation
5. Bellgate Constructions Limited 100 100 Cyprus
6. OOO Regionalnoe AgroProizvodstvennoeObjedinenie (RAPO) 100 100 Russian Federation
7. OOO Aristeya 100 100 Russian Federation
8. Scotson Limited 100 100 Cyprus
7. ZAO Nedra Publishing 90.17 90.17 Russian Federation
8. OOO Titon 100 100 Russian Federation
9. ZAO MTOK 99.71 99.71 Russian Federation
10. OOO Eitan K 100 100 Russian Federation
11. OOO Semprex 100 100 Russian Federation
12. OOO Zheldoruslugi 95 95 Russian Federation
13. OOO Bizar 74 74 Russian Federation
13. AFI D Finance SA 100 100 British Virgin Islands
35. DISPOSAL OF INVESTMENTS IN JOINT VENTURES/SUBSIDIARIES
The profit on disposal of subsidiaries consists of:
Profit on disposal of non-significant subsidiaries
190
Profit on disposal of Westec Four Winds Ltd
32,088
During the year the Company disposed its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project, of a book value of US$1,400 thousand. The selling price of the disposal was $1,400 thousand. The resulting profit on disposal amounting to US$114 thousand was recognised in the income statement.
The above disposals had the following effect on the Group's assets and liabilities:
31/12/14
(14)
Current tax asset
(2)
Deferred tax assets
Net identifiable assets
(1,416)
Consideration received in cash/ Net cash inflow from the disposal of
Non-significant subsidiaries
The selling price of the disposal of Westec Four Winds Ltd was US$103,380 thousand. The resulting profit on sale amounting to US$32,088 thousand and a translation reserve of US$30,288 thousand was reclassified as a realised exchange loss in financing expenses of the income statement of first quarter 2013.
36. NON-CONTROLLING INTERESTS
There were no individually significant subsidiaries which have material NCI.
37. OPERATING LEASES
Leases as lessee
Non-cancellable operating lease rentals are payable as follows:
Less than a year
6,688
15,980
26,327
21,676
40,213
60,167
73,228
97,823
Amount recognised as an expense during the year
2,298
The ownership of land in the Russian Federation is rare and especially within Moscow region, in which all of the property with only a few exceptions, is owned by the City of Moscow. The majority of land is occupied by private entities pursuant to lease agreements between occupants, of the building located on the land, and the City of Moscow. The Group has several long-term operating leases for land. These leases are entered into with the intention and right to develop the land and carry out construction. Typically they run for an initial period of one to five years which is the period of development and upon completion of development the developer has the right to renew for a long term period of usually up to 49 years. Under both leases the lessee is required to make periodic lease payments, generally on a quarterly basis to the City of Moscow.
There is also the option of long term land lease prior to commencement of construction which the developer can acquire with a lump sum payment that is determined from time to time by the City of Moscow and is based on the size of the land, its location and the proximity to amenities. The Group has two such land rights and they run for period of 49 years.
Leases as lessor
The Group leases out investment property under operating leases. The future minimum lease payments under non-cancellable leases are as follows:
122,501
125,244
169,227
204,548
51,603
46,928
343,331
376,720
Amount recognised as income during the year
122,226
126,814
38. CAPITAL COMMITMENTS
Up to 31 December 2014 the Group has entered into a number of contracts for the construction of investment or trading properties:
Project name
Commitment
16,081
53,058
Kosinskaya
1,560
20,253
TVZ Plaza IC
2,600
12,776
Serebryakova
7,243
7,332
Pavaletskaya II
4,311
3,733
TVZ Plaza IV
140
3,592
TVZ Plaza II
1,080
1,297
474
33,489
102,375
39. CONTINGENCIES
There were not any contingent liabilities as at 31 December 2014.
40. RELATED PARTIES
Outstanding balances with related parties
Amounts receivable from joint ventures
Amounts receivable from ultimate holding company
203
Amounts receivable from other related companies
12,780
Long term loan receivable from joint ventures
Amounts payable to joint ventures
131
170
Amounts payable to ultimate holding company
433
435
Amounts payable to other related companies
1,700
3,483
Deferred income from related company
156
266
All outstanding balances with these parties are priced at an arm's length basis and are to be settled in cash. None of the balances is secured.
Transactions with the key management personnel
Key management personnel compensation comprised:
5,311
4,401
Share option scheme expense
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The person is a member of the key management personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key management is not limited to directors; other members of the management team also may be key management.
Other related party transactions
Joint venture - consulting services
Joint venture - rental income
Joint venture - other income
Joint venture - interest income
1,920
2,523
Related company - rental income
1,519
1,358
Ultimate holding company - administrative expenses
766
Joint venture - operating expenses
177
193
Joint venture - administrative expenses
Other related companies - administrative expenses
Construction services capitalised
Related company - construction services
13,728
9,076
41. SUBSEQUENT EVENTS
Subsequent to 31 December 2014 there were no events that took place which have a bearing on the understanding of these financial statements except of the following:
In January 2015, the Company's subsidiary, Krown Investments LLC ("Krown") signed an addendum to the loan facility agreement with VTB Bank OJSC ("the Bank), extending the term of the loan to 26 January 2018. Krown, which owns the Aquamarine III (Ozerkovskaya III) office complex, had an existing loan from the Bank maturing on 26 January 2015, of which US$ 205 million was outstanding. In addition to extending the term of the loan, the new addendum amended the payment schedule and interest rate conditions of the loan agreement and introduced new covenants. The payment schedule anticipates repayments of the principal starting from the 4th quarter of 2015, while the new covenants include a Debt Service Coverage Ratio of 1.2 also applicable as from the 4th quarter of 2015 and a Loan to Value ratio of 65% applicable from January 2015. In line with the addendum, on 26th January 2015 Krown paid US$10 million to the Bank as partial repayment of the outstanding loan amount, thus reducing the total to US$195 million. About 90% of the principal is to be paid at maturity.
[1] The Economist Intelligence Unit forecasts Russian real GDP growth for 2015 at -3.5%; consumer price inflation for 2014 is estimated at 11.9% (EIU Russia Country Report February 2014).
[2] Cushman&Wakefield Market Beat report 2014.
[3] Cushman&Wakefield, Retail Snapshot Q4 2014.
[4] Debt includes all loans and borrowings. For further details please see note 28 to the Financial Statements.
[5] According to the IFRS rules, Investment property and Investment property under development are presented on a fair value basis, Trading property and Property, plant and equipment are presented on a cost basis.
[6] This is the area after the disposal of part of the parking space to "VTB Bank" JSC.
[7] After the disposal of Building 1 to Alrosa in 2013.
[8] Debt includes all loans and borrowings. For further details please see note 28 to the Financial Statements.
1Valuation figures represent Company's share (74%)
2 Valuation figures represent Company's share (95%)
3 Valuation figures represent Company's share (99%)
4 The project portfolio includes 50% owned joint ventures, which are accounted by equity method
5 Valuation figures represent Company's share (90%)
[9] According to common market practice in Russia and to applicable Russian laws, preliminary sales of apartments during construction are done in the form of "contracts of participation in construction", which are executed between the developer and purchaser of an apartment. These contracts are registered with state authorities and enter into legal force after this state registration. However the Company considers that signed contracts have high probability of registration and entering into legal force and reports "units sold" as the number of contracts signed with the apartments purchasers.
[10] Including City Share
[11] Average completion rate is calculated based on the completion rate of the dollar budget in rouble terms. Therefore, FX fluctuations influence the percentage of completion.
[12] The information is forward-looking information based on the data available to the Group on the date of this Periodic Report. Due to factors beyond the Group's control, the project may not be completed on the date shown in the table.
13 The inventory figures include only Stage 1 apartments
[13] All information presented in the table corresponds to Phase 1 of the project
[14] Expected revenues detailed hereinafter include revenues from the sale of commercial areas.
[15] Expected costs detailed hereinafter include costs in respect of the construction of commercial areas.
[16] Total cost of project include cost of Phase 1, Stage 1 and Phase 1, Stage 2 and historical cost
[17] The gross profit margin is calculated based on expected revenues. It is difficult for the Group to project gross profit since the profit margin is dependent on factors some of which are not in the Group's control. Accordingly, the information given here is forward-looking information and there is no certainty that it will be realized. In this context it should be clarified that the expected revenues were estimated based on the selling prices of the Group's proximate projects and expected costs (apart from the cost of the land which is known in full or in part) were estimated based on signed contracting contracts and/or expenses the Group has paid out in proximate projects. It should also be clarified that the cash flow was not discounted over the life of the project.
[18] Relates to the beginning of the execution of the Stage 3 of Phase 1.
[19] Source: IMF Statistics
[20] Source: IMF statistics
[21] Source: The Economist Intelligence Unit
[22] Source: Rosstat
[23] Decrease in the amount of properties due to reclassification of Kossinskaya from office to retail properties
[24] Increase in the amount of properties due to reclassification of Kossinskaya and addition of Paveletskaya II project (which was previously refered as land)
[25] In November 2012 Bellgate Construction Limited ("Bellgate"), the Company subsidiary owning and operating AFIMALL City, disposed of approximately 643 parking lots to VTB Bank JSC, which is using this parking space for its office headquarters located next to AFIMALL City. The transaction is structured in two stages. The first stage entailed a sale-purchase transaction between Bellgate and VTB Bank on 21,354 sq.m. of parking space. During the second stage 9,247 sq.m. owned (at completion) by VTB Bank will be exchanged for 7,847 sq. m. owned by Bellgate. The first stage of the transaction was completed in June 2013.
[26] Construction of AFIMALL City was carried out based on an investment agreement of 2005 executed between the City of Moscow and Bellgate. GUP of the City of Moscow "Tsentr City" was engaged in the project by the City of Moscow as a project management company and held lease rights to the land plot underlying the construction site of AFIMALL City under the lease agreement executed in 2005. In July 2012, Bellgate became a co-tenant of the land plot underlying, inter alia, AFIMALL City and the underground parking under a land plot lease agreement with multiple tenants executed with the City of Moscow. Under Russian law, a lease agreement with multiple tenants (co-tenants) is executed when there are several owners/users of different real estate objects located on the same land plot.
[27] It is noted that long-term lease agreements entered into for a period of one year or more as well as ownership rights are registered with the Real Estate Register. Accordingly, ownership rights of Bellgate to the properties of AFIMALL City and the underground parking are registered with the Real Estate Register. Bellgate is a co-tenant of the land plot underlying the AFIMALL City and the underground parking, and the lease agreement is registered in the Real Estate Register.
[28] As of 31.12.13 and onwards the occupancy data is presented as a percentage of the total GLA (gross leasable area) - 107,208 sq.m.
[29] Stores under operation except kiosks and terminals
[30] The first draw down of the credit facility was made by the holding company on June 29, 2012.
[31] Calculated based on average unrecoverable operational expenses till the date of assumed disposal of the property