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Friday 28 June, 2013

Argo Real Estate Op

Interim Results to 31 March 2013

RNS Number : 0750I
Argo Real Estate Opportunities Fd
28 June 2013
 



Argo Real Estate Opportunities Fund Limited

Interim Results

Argo Real Estate Opportunities Fd

28 June 2013

 

 

 

Argo Real Estate Opportunities Fund Limited

 

(the "Company"/ "AREOF" / "Group")

 

Interim Results for the 6 months ended 31 March 2013

 

 

Argo Real Estate Opportunities Fund Limited, the closed-ended investment company formed for the purpose of investing primarily in the commercial property markets of Central and Eastern Europe, today announces its interim results for the 6 months ended 31 March 2013.

 

 

Key Points:

 

§ Adjusted NAV per share¹ of €0.1127 (30 September 2012 €0.1213).

 

§ NAV per share of €0.0947 (30 September 2012 €0.1039).

 

§ Losses in the period of €4.1m (31 March 2012 loss €4.9m) which included losses on investment property values of €4.1m.

 

§ During the period the Group has not been able to meet full debt service and as such breached the terms of the loans supporting its Sibiu 1, Sibiu 2 and Oradea assets, together with the terms of the Company loan from Proton Bank. Discussions with the relevant lenders are ongoing while the Sibiu 2 default has been remedied subsequent to the period end.

 

 

Notes:

¹Adjusted NAV is calculated before any deferred tax liability

 

 

 

 

Further information:

 

Argo Real Estate Opportunities Fund Limited

David Clark, Chairman

 

Nominated Adviser and Broker

+44 (0)1481 231101

finnCap Limited 

Matthew Robinson

Henrik Persson

 

 

 

+44 (0) 207 220 0500

 

 


CHAIRMAN'S STATEMENT

 

This report sets out the results for Argo Real Estate Opportunities Fund Limited ("AREOF"/ "Company"/ "Group") covering the 6 month period ended 31 March 2013 and discusses its progress in the ongoing development and active asset management of its retail and mixed-use commercial property investments in Central and Eastern Europe.

 

Financial Performance

 

The NAV per share and Adjusted NAV per share as of 31 March 2013 are €0.0947 and €0.1127 (see Note 4) reflecting a decrease of €0.0092 and €0.0086 respectively in the 6 month period since 30 September 2012. This decrease has arisen principally from the decline in the market values of the Group's property assets where the weakness of tenant income conditions and the lack of property transactions has impacted the asset valuations notably in Romania.

 

The financial statements for the period to 31 March 2013 show a loss attributable to equity shareholders of €5.4m which includes a net loss from fair value adjustment on investment properties of €4.1m.

 

Dividend

 

The Board has resolved that the Company will not declare a dividend for the period as it continues to utilise its resources to maximise liquidity within the Company during the current turbulent and hostile trading conditions.

 

Operating Activities

 

While macroeconomic conditions continue to improve, albeit slowly, the uncertainties in Europe mean that the recovery in markets where the Group operates remain subdued with little or no growth in the underlying economies.

 

The continuing effect of low disposable incomes, the lack of investment income and political uncertainties all combine to keep retail sales depressed, particularly in Romania. In such circumstances, the balance of negotiation interest still continues to favour the tenant and the need for the landlord to continue to provide continued rental concessions, albeit at a reducing level, and/or fit-out contributions to attract stronger tenants, impacts the project companies and the Group's cash flows.

 

The reduced level of cash flow, while being proactively managed, has affected the Group's ability to meet all the payments due to certain of the lending banks as when they fell due as more fully explained below. This situation is being remedied by way of discussions with the lending banks where these breaches of the terms have occurred with a view to restructuring the loans to better align the Group's cash flows to the loan commitments during this subdued trading period. While the discussions with the relevant banks are on-going to find an agreeable solution for both parties, during this period the Group continues to enjoy the support of its banks.

 

The Group has also been affected to a limited extent by the financial crisis that occurred in Cyprus in April of this year, as the Group has loan facilities where the lenders are Cypriot banks that are subject to restructuring. In particular, Era Shopping Park Iasi is supported by a loan facility from a syndicate of lending banks which includes the Bank of Cyprus and this is likely to delay and/or frustrate the Group's ability to draw down on the remaining €17m of the loan facility needed to complete the Era Shopping Park Iasi. In addition, the Bank of Cyprus is part of a syndicate of lending banks to Era Shopping Park Oradea for which there are on-going negotiations to restructure the loan terms. Laiki Popular Bank, another Cypriot bank, is the sole lender to the Group's Riviera Shopping City asset where discussions are in progress to release surplus funds from the project company for use by the Group in general. Laiki Popular Bank is also part of a syndicate of lenders to Sibiu Shopping City.

 

Despite the challenging environment in Romania, the Company's 77,000 sqm Sibiu Shopping City maintains its dominant trading position in the region. Following the completion of recent asset management initiatives last year reconfiguring the space and providing a new Mall entrance, occupancy is currently 92% but tenant demand remains strong and vacant space is likely to be fully filled in 2013.

 

The Company's 50,000 sqm Suceava Shopping City project continues to face strong competition in its trading catchment area and reduced consumer expenditure in the region and severe winter weather conditions have impacted trading. Nonetheless, proactive management of the centre is replacing weaker trading tenants with stronger better covenant tenants with the aim of improving tenant mix and improving customer traffic at the centre.

 

The 65,700 sqm Era Shopping Park, Oradea, anchored by leading tenants Carrefour, Altex and Bricostore operates with the 16,000 sqm shopping mall completed in 2012 along with the 8,000 sqm Mobexpert furniture store. While trading activity continues to show year on year growth, competition remains strong from two competitor centres and trading generally is mixed due to subdued consumer expenditure. Furthermore, the Company's ability to attract new tenants is restricted by the lack of fit-out funding while negotiations for release of such facility are on-going with the lending banks.

 

The 49,800 sqm Era Shopping Park, Iasi, anchored by leading tenants Praktiker, Decathlon, Carrefour and Mobexpert suffers from very strong competition in the region, particularly from a further centre opened in 2012. While traffic and sales have declined from last year, not helped by severe winter conditions, proactive marketing and management is attracting new tenants. However, the construction of the 28,000 sqm Mall extension is ready to proceed but is subject to agreement on negotiations with the syndicated lending banks to proceed with the further development facility.

 

The 83,000 sqm Riviera Shopping City, Odessa, includes a 14,000 sqm Obi DIY store along with key anchor tenants Real Hypermarket (recently rebranded as Auchan Hypermarket), Inditex fashion brands (Zara, Stradivarius, Bershka, Pull & Bear) as well as offering a 12-lane City Bowling leisure complex and a nine-screen IMAX multiplex cinema. The leasing strength of this asset has continually improved since its opening in 2009 and the strong tenant demand is reflected in the near current near 100% tenant occupancy level. The completion of asset fashion gallery asset management initiative in 2012 has further enhanced the attractiveness of this centre to customers and tenants alike. 

 

The Group's previously acquired land assets in Nikolaev, Ukraine and also in and around Chisinau, Moldova, continue to be land banked pending  an improvement in current economic conditions that would make development  financially viable or a disposal can be realized maximizing shareholder value.

                                                                                           

Full details of all the projects entered into by the Company are further explained in the Investment Manager's report.

 

Financing Facilities                 

 

The Group is currently in various stages of negotiation with regard to restructuring and agreeing amended terms with its existing Banks on several of its loans.

 

(i)   Proton Bank loan interest due at the end of December 2012 could not be met resulting in a covenant breach of this loan and discussions with the bank are ongoing while the Group seeks to release surplus funds in its Ukraine project company, with the agreement of its lending bank,  for wider use by the Group.

 

 

(ii)   Under the KBC Bank led loan arrangements on Sibiu Shopping City,  the Company was only able to part pay the loan  amortisation amounts that fell due in the period and as a result the loans of the project companies for both Sibiu 1 and Sibiu 2 went into default. In the case of the Sibiu 2 loan this was cured after the period end with the payment of the Eur 1 million owing, however, in respect of the Sibiu 1 loan that matures at the end of 2013, discussions with the lenders  are currently ongoing with the aim of restructuring the debt and extending it beyond its maturity.

 

(iii)  For both Era Shopping Parks in Oradea and Iasi discussions for restructuring the loans with the syndicated banks of EFG, Bank of Greece, Bank of Cyprus, Banca Romaneasca, in the former case to better align the terms to current and anticipated cash flows and in the latter case to permit the release of the balance of the development facility to undertake the extension of the existing mall, are ongoing. Both project loans are currently in breach of certain of the loan terms and while the support of the lenders is enjoyed, a conclusion to the restructuring discussions is being delayed by the reorganization of the Cypriot lenders within the syndicate, as referred to above.  

 

Accounting Practices               

 

The Group has continued to apply International Financial Reporting Standards ("IFRS"), as endorsed for use in the European Union, in the following unaudited condensed interim consolidated financial statements. The Group's presentational currency is the euro.

 

Shareholder Communication

 

The Investment Manager aims to keep shareholders and other interested parties informed of developments through its website: www.argocapitalproperty.com.

 

Outlook

 

Since the release of our previous financial statements earlier this year there is a tentative calm in financial markets although there are no clear signs of it yet feeding through into a meaningful recovery for Eurozone economies. Until this happens, Romania and Ukraine, AREOF's principal markets, are unlikely to experience any significant pick up. According to the latest forecasts from the International Monetary Fund, economic growth in these countries will be anaemic at best in 2013 with Romania experiencing a gain of less than 2% and Ukraine virtually none at all. While this remains the case, the value of the Company's assets in these countries is unlikely to enjoy any significant increase in value.

 

Nevertheless, the Board is of the view that Romania and Ukraine remain attractive destinations to invest over the long-term. In the near term, the Company will remain focused on measures to maximize cash flows at each of its individual assets and will invest in them via selective and carefully budgeted asset management initiatives that clearly have the potential to be value enhancing.

 

Recently, AREOF has become aware that certain parties have expressed interest in buying portions of the debt facilities that support certain of the Company's real estate parks. AREOF will vigorously defend itself against any tactics that fail to respect the full value of the Company's assets.

 

 

David Clark

Chairman

 

27 June 2013

 

 

INVESTMENT MANAGER'S REPORT

 

The Investment Manager implements a focused strategy on behalf of AREOF to create an institutional quality retail property portfolio in leading primary and secondary cities in Central and Eastern Europe with a particular focus on Romania, Ukraine and Moldova.  The Manager continues to reposition the portfolio to take advantage of a potential macroeconomic improvement in the region through strong asset management.  Despite the continued search for low-cost acquisitions in the form of share swaps which could increase the visibility of the portfolio to date this has not been possible given that quality assets are still expensive with valuations based on  capitalisation rates around 8-9 per cent.

 

European economic conditions remain very subdued with little or weak growth dominating throughout. In Romania, through the latter part of 2012 the economy was near stagnant, albeit with weak positive growth in GDP and while 2013 has shown little improvement, the GDP growth was higher than expected. Other positive signs include improving liquidity conditions resulting from lower rates and in the context of a favourable inflation environment further interest rate cuts should be expected. The challenges of potentially weak export demand from a weak Europe, restricted public spending (strong fiscal consolidation), the lack of funding for infrastructure projects (low EU fund absorption) and political uncertainty remain although there have not been many political rumblings in the last few quarters.

 

Romanian retail continues to face challenges as most disposable income is directed towards food items and primary need expenditures.  The effects of the limited availability of financing is also keeping supply changes unchanged and very few operators or potential operators in the market are willing to develop retail schemes other than comparative small projects anchored by hypermarkets. In general, capital market activity remains subdued in Romania and developments have focused mostly in office and the small retail projects.

 

Rental concessions to Romanian tenants continue to be necessary to retain key tenants who have not been trading well and as a result the Company's cash flow still remains weak requiring the support from the project company banks. The Manager believes that these discounts while decreasing will be necessary well into next year.

 

In Ukraine the economy continues to be stagnant with GDP growth near zero.  Although valuations are attractive, the political and macroeconomic environment is causing international investors to exit. Investment activity also remains restricted due to the very limited availability and high cost of debt financing, although there are a few developments being undertaken especially in Kiev by groups with sizeable equity to invest.       

 

Debt facility discussions with the Fund's banks have dominated throughout the period. The restructured terms of Suceava Shopping City's Alpha Bank facility were completed extending it to November 2015 at a reduced rate of interest together with a cash sweep of loan amortisation. In the period the full debt repayments on the KBC Bank loans in respect of Sibiu Shopping City could not be met when they fell due, however, the default on the Sibiu 2 syndicated debt has since the period end been cured with full repayment of the sum due and outstanding. Discussions with KBC on the restructuring of the Sibiu 1 loan to remedy the default and also to extend the facility beyond its maturity later in 2013 are currently ongoing. At the end of 2012 the Group's liability for interest due on its Proton Bank loan could not be met and discussions with the Bank are similarly ongoing.

 

The banking distress suffered in Cyprus in April of this year has affected the Group where the Bank of Cyprus and Laiki Popular Bank are lenders to a number of the Fund's projects. This has impacted the Group by delaying progress on the negotiations to restructure the Oradea and Iasi project loans and also in getting Laiki Popular Bank's agreement to release surplus available cash from the successfully performing Riviera Shopping City, Ukraine project for wider use within the Fund.

 

The 6 month period to 31 March 2013 has seen a €5.6m decrease in the NAV attributable to equity holders resulting in a period end NAV of €57.6m. The decline was largely due to the net write down of Group asset values reflecting weak tenant income conditions and the lack of property transaction activity particularly in Romania. The Group obtained third party valuations from independent valuers on the portfolio of its property assets as at 31 March 2013.

 

The key property asset effects on the NAV during the period were:

-     Suceava Shopping City: an increase in fair value of €2.7m,

-     Sibiu Shopping City: a decrease in fair value of €4.0m,

-     Era Shopping Park, Oradea: a decrease in fair value of €2.5m,

-     Era Shopping Park, Iasi: a decrease in fair value of €1.0m, and

-     Riviera Shopping City, Odessa: an increase in fair value of €0.7m.

                                                                                                     

Where the Group provides incentives to its customers, both in terms of fit-out contributions or rental concessions, the cost of these incentives is recognised over the lease term, on a straight line basis, as an adjustment to rental revenue. Incentive adjustments of €0.5m were added to rental income in the period to 31 March 2013 and accumulated incentives at the period end amounted to €12.2m.

 

Under current market conditions the following risks continue to exist for the Company:

 

(i)  Although certain of the project subsidiary companies remain cash flow positive the restrictive use of surplus funds which are subject to lenders' approval for release means that at the present time the negative situation of the Company continues. Further equity or other infusion of cash is likely to be required later in 2013.

 

(ii) The weakness, competitive pressure and slowness of recovery in the local retail environments causing existing tenants to continue to request reductions in rent which in turn impacts the level of the Group's income sufficient to service its debts on full repayment basis without further bank concessions being agreed.

 

Transaction Overviews

 

European Retail Park Sibiu, Romania

AREOF's Sibiu Shopping City, was acquired in November 2006, and through continued asset management remains the strongest centre within the Romanian portfolio.  Occupancy is 92% and as tenant demand remains healthy, we are on target to reach full occupancy by the end of the year.

The retail park was expanded both in 2007 and 2008, with a number of extensions and reconfigurations The property is held within two separate project companies and as such is known as "Sibiu 1" & "Sibiu 2". An asset management initiative connecting Sibiu 1 and 2 was carried out in 2011, however, the contractor for the connection building entered insolvency in December 2012 with some works remaining.  These works now need to be completed in order to formalise the completion and building registration.  Additional equity has been requested by the lenders to part finance these costs.  Since the opening the new Mall entrance completed in 2012, customer footfall has increased by approximately 8%.

Despite a weakening customer demand in the first quarter of 2013 throughout Romania, tenant demand for the centre remains strong.  The Manager has been replacing weaker tenants and improving the tenant mix and ten new tenants have opened stores since October 2012.  Negotiations have progressed with Decathlon with their store opening anticipated for later this year.

An audit of all service charge costs across the portfolio has identified a number of cost reductions for the centre which are being implemented.   Rental concessions now account for less than 3% of gross rental income and we anticipate the majority of concessions will fall away by early 2014. Auchan's takeover of the Real supermarket store is expected in June, with rebranding of the store scheduled for the autumn. 

 

Negotiations are progressing with KBC for the refinancing of the outstanding €57.7m debt facility for Sibiu 1 which expires in November 2013.   Various discussions and proposals have taken place between the Manager and the Bank and we are awaiting their proposed term sheet.

 

The remaining €25.4m investment loan from KBC, Investkredit and Marfin/Laiki Bank expires in June 2016 and the delayed amortisation payment of €1m that fell due at 31 March has since been made to cure the default.

  

The market value of the property as at 31st March 2013 was €77.1m on Sibiu 1, against a 30 September 2012 valuation of €79.6m; and a valuation of €34.8m on Sibiu 2, against a comparative September 2012 valuation of €35.5m.

 

Suceava Shopping City, Suceava, Romania

 

Trading performance of the 50,000 sqm centre over the period was mixed with improved trading period traffic in the last quarter of 2012 followed by a year on year decline in sales in the first 3 months of 2013.  This was partly due to the severe winter weather, but also a reduction of consumer expenditure in the region. The centre continues to face strong competition and surprisingly a further retail project is planned within the vicinity.  We have issued a formal objection with the City authorities to their building permit application.  Despite strong competition for tenants in the city the Manager has signed leases with 9 new tenants and there are active negotiations with a further 5 potential tenants. The Manager has also agreed terms with Decathlon for a 1,500 sqm store, which will improve traffic circulation.

 

Rental discounts for local tenants will continue for 2013 and the Manager is focused currently on strengthening the tenant mix and improving collection rates.  A number of operational cost reductions for the property have been implemented and a strategy for replacement of the electrical provider is being examined.

 

The three year €50m facility (46.1moutstanding)with Alpha Bank of Greece, has been restructured and extended to November 2015. The amortisation payments are being undertaken by a quarterly cash sweep of surplus revenues.  

 

The 31st March 2013 market value of the property has increased to €64.6m from a 30 September 2012 valuation of €62.3m.

 

Era Shopping Park, Oradea, Romania

 

Era Shopping Park, Oradea comprises a 65,700 sqm retail park, on the outskirts of the city, which opened Phase 1 in March 2009 with leading anchor tenants Carrefour, Altex, and BricostorePhase 2, which comprises the 16,000 sqm Mall, was completed in early spring 2012 and  a Mobexpert furniture anchor of 8,000 sqm opened in May 2012. Phase 3 of approximately 4,000 sqm will be opened following pre-leasing.

 

The full 62.3m construction facility from EFG, Banca Romanesca, Bancpost and Bank of Cyprus (BoC) has been fully drawn, but fulfillment of conditions for conversion to the investment facility remains outstanding. Prior to the recent problems with BoC, the Manager had almost finalized an agreement with the lending banks to a rescheduling of payments and an interest rate reduction.  Completion was delayed as BoC were considering the potential sale of the Romanian branch as part of a restructuring.  All deposits and administrative staff from BoC Romania have now been transferred to Laiki Popular Bank, whilst the corporate Loans remain with the Bucharest office.    The Lenders syndicate has committed to finalise the restructuring and revised term sheet is pending. Operational payments continue to be made as usual.

 

Traffic has increased consistently year on year, however sales have declined slightly during the first part of 2013.  This is in line with the general retail market throughout Romania, as consumer confidence remains subdued.   To counter weaker demand the Manager has embarked on a number of attractive marketing and sales promotion campaigns which have contributed to this increased traffic.

 

The Era Home Centre area offers the largest selection of home decoration and furnishings in the region and continues to perform in line with tenants' expectations. As the standby loan facility required for tenant fit out contributions remains blocked, no major new leases have been signed.  A number of agreed lettings can be completed, when the standby facility is reopened.  The Manager has however signed leases with 9 tenants totaling 2,330 sqm, as no fit out contribution was required. 

 

The Manager has agreed with RDS to install photovoltaic panels on the roof, which will reduce the electricity costs for the centre by around 20%. Lenders' approval is awaited prior to installation commencing in the summer. 

 

The market value of the property was 77.2m at 31st March 2013, against a 30 September 2012 value of €79.3m.

 

Era Shopping Park, Iasi, Romania

 

Era Shopping Park, Iasi comprises some 49,800 sqm of retail park of which Phase 1 of some 33,000 sqm comprising Carrefour, Praktiker and the Gallery was completed in September 2008. The Gallery was extended in September 2009 with the addition of an 8,000 sqm Mobexpert furniture store and in May 2010 Decathlon purchased a 2.4 hectare site and constructed and opened their 3,000 sqm store.

 

The new Palas scheme in the city centre has continued to impact all other existing centres since our last report.  Traffic and sales have declined year on year and the severe winter weather in January and February also further impacted traffic.  The Manager increased marketing activities with a number of attractive events together with sales promotions, which have improved the situation.   Letting activity remains active with a total of 7 new tenants signed since October.  

 

Construction of the 28,000 sqm Mall extension has been delayed until the situation with Bank of Cyprus is resolved.    The Mall currently has all permits necessary and the works have been tendered, however negotiations are on hold with contractors. The 8 hectares of surplus land is being marketed for sale or development.   Terms are agreed with BMW to lease 6,000 sq m of land to develop a showroom, which is subject to approval from the lending banks.  Negotiations are on going with a petrol filling station and other motor trade users.

 

A €77m development facility provided by EFG, Banca Romanesca, Bancpost and Bank of Cyprus is in place for the construction finance of the total project, of which €60m has been drawn to date. The restructuring of the existing facility is delayed due to the reorganisation of Bank of Cyprus. Upon finalisation of the restructuring the current construction program is expected to deliver Phase 1 of 15,000 sqm within 15 months and Phase 2 within 18 months. 

 

Despite the financing delay the Manager has a number of active negotiations with key anchor tenants for the Mall.

 

The market value of the property was €75.9m at 31st March 2013 against a 30 September 2012 value of €76.5m.

 

Riviera Shopping City, Odessa, Ukraine

 

The Company's 83,000 sqm Riviera Shopping City centre in Odessa initially opened in October 2009 with key anchor tenants including Obi DIY Store, Real Hypermarket, Inditex fashion brands Zara, Stradivarius, Bershka, Pull & Bear and Oysho along with many others. Subsequent phased completion of the development saw the successful opening of the City Bowling and Leisure Complex along with the Imax Multiplex Cinema.

 

At the end of 2012 Auchan Group acquired part of the business of the Metro Group AG comprising 91 Real hypermarkets and 13 Shopping Galleries in Eastern Europe, namely Russia, Ukraine, Poland and Romania. In accordance with the terms of the deal Real Hypermarket in Riviera was rebranded and Auchan Hypermarket opened at the end of April. 40,000 customers attended at the opening and an increase in footflow of around 20% occurred in April/May in comparison with the respective months of 2012. 

 

Attendance and retailer sales continue to exceed estimates confirming the Company's development as an important and sustainable regional retail destination. The footflow of the Mall for 2013 has increased by 8% compared with the same period of 2012.

 

The leasing situation of the centre has continually improved since completion and its attractiveness has led to strong demand amongst retailers for space in the centre which has resulted in the occupancy level being near 100%.

 

The asset management initiative creating an attractive fashion gallery of 2,500 sqm opened in June 2012 in space previously occupied by an underperforming tenant is currently 93% let.

 

Current financing arrangements consist of a €68m Marfin/Laiki Bank investment facility. At the period end the outstanding facility was €65.5m. The continued improving performance of the centre as rental incomes improve and are added to through management initiatives, means that the Company is able to fully cover both interest and amortisation and the Manager is currently in discussion with the Bank to agree to the release of surplus cash resources from the project subsidiary for wider use within the Fund.

 

The market value of the property was €106.5m asat 31 March 2013 against a 30 September 2012 value of €106.0m.

 

Nikolaev, Ukraine, Freehold Development Site

 

The 20 hectare freehold plot is located about 5 km's outside of the city centre on the primary motorway from Odessa and near a future intersection with the planned Nikolaev ring road.

 

While there are very few land transactions currently in the region the Company seeks strategic opportunities to realise value from this asset. It is felt that when market conditions improve this site could accommodate a logistic warehouse park site servicing this important port city or an out of town factory outlet retail project.

 

The freehold land is in ownership of the Company and has a market value of €0.61m at 31 March 2013 compared to a valuation of €0.61m at 30 September 2012.

 

 

Moldova Retail and Mixed Use Development Sites, Chisinau, Republic of Moldova

 

In conjunction with a local partner, the Group is completing the assembly of a retail and mixed-use development site in the historic city centre of Chisinau, the Republic of Moldova's capital. The Group also owns two further potential out-of-town retail and mixed-use sites on a prominent motorway to the airport locations on the periphery of Chisinau.

 

The Investment Manager has entered into a commercial relationship with a local partner for the exploitation of the Company's land assets with the goal of realising equity proceeds from these assets. The Investment Manager at the moment negotiates to start implementation the development of the 1st phase of residential/office premises.

 

The Moldovan assets' market values at 31 March 2013 totalled €4.3m, compared to a valuation of €4.3m at 30 September 2012.

 

Outlook

 

The modest decline in the value of AREOF's assets reflects the ongoing weakness of the markets in which the Company operates. This is unlikely to change during the second half of 2013. As a consequence, the Manager will remain focused on identifying cost reductions across all assets, particularly those in Romania which do not enjoy the local dominance of the Company's Odessa centre. Rental discounts enjoyed by some tenants in Romania are likely to remain largely in place although it is hoped that the Manager will be able to start to phase them out during the later stages of the year. Irrespective of this, cash flows and banking covenants across all the Company's assets in Romania will remain under pressure.

 

The Manager expects the next 6 months to be dominated by discussions with the banking syndicates that support the Group's Sibiu 1, Iasi and Oradea assets. Furthermore, the Manager hopes to have agreement from the project bank as to the release of surplus cash generated by the Company's Riviera Shopping City centre in Odessa for its wider use within AREOF. It should be noted that these banking negotiations may be slowed by the ongoing restructuring of BoC (a lender to the centres in Iasi and Oradea) and Laiki Bank (sole lender to Riviera). Regarding the Company's debt facility with Proton Bank, the Manager is in talks with the lender aimed at concluding a remedy of the outstanding default.

 

 

 

Dennis Selinas                                                             Graeme Daniel

Fund Manager                                                             Finance Director

 

On behalf of Argo Capital Management Property Limited

 

27 June 2013

 

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months ended 31 March 2013

 

 

 


Note


6 months to   31 March 2013

6 months to   31 March 2012

Year ended          30 September 2012




(unaudited)

(unaudited)

(audited)




€'000

€'000

€'000

Continuing operations






Revenue



20,197

19,117

37,302

Property operating expenses



(7,592)

(6,962)

(15,338)

Net rental and related income



12,605

12,155

21,964







General expenses



(1,934)

(2,091)

(4,473)

Net (loss)/gain from fair value adjustment of investment property

5


(4,056)

(6,101)

571

Changes in fair value of loans receivable



12

(56)

(49)

Operating profit



6,627

3,907

18,013

Finance Income



1,144

714

2,180

Finance Costs



(11,089)

(11,285)

(23,084)

Finance costs - net



(9,945)

(10,571)

(20,904)

Foreign exchange (losses)/gains on translation of foreign operations



(111)

349

(229)

Loss before tax



(3,429)

(6,315)

(3,120)

Income tax charge/(credit)



(690)

1,417

(653)

Loss for the period



(4,119)

(4,898)

(3,773)

Foreign exchange (losses)/gains on translation of foreign operations



(196)

(86)

333

Total other comprehensive loss



(4,315)

(4,984)

(3,440)







(Loss)/profit attributable to :






Equity shareholders



(5,413)

(4,122)

(2,878)

Non-controlling interest



1,294

(776)

(895)




(4,119)

(4,898)

(3,773)







Total comprehensive (expense)/income attributable to :






Equity shareholders



(5,606)

(4,205)

(2,552)

Non-controlling interest



1,291

(779)

(888)




(4,315)

(4,984)

(3,440)







Basic and diluted earnings per share

3


(0.009)

(0.007)

(0.005)

 

 

 

 

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 March 2013

 

 


Note


31 March 2013

31 March 2012

30 September 2012




(unaudited)

(unaudited)

(audited)




€'000

€'000

€'000

ASSETS






Non-current assets




Investment properties

5


434,079

429,639

437,833

Property, plant and equipment



189

221

201

Trade and other receivables



11,488

7,089

10,249

Tax receivables



3,021

5,530

4,415

Loans receivable

6


1,056

969

1,050

Total non current assets



449,833

443,448

453,748

Current assets




Trade and other receivables



7,007

9,919

6,954

Tax receivables



2,280

2,022

2,154

Loans receivable

6


9,230

9,230

9,230

Cash and cash equivalents



13,099

15,025

11,631

Total current assets



31,616

36,196

29,969

Total assets



481,449

479,644

483,717

EQUITY AND LIABILITIES






Equity attributable to owners of the parent company






Share capital

7


6,080

6,080

6,080

Share premium

7


18,159

18,159

18,159

Other reserve



95,096

95,096

95,096

Translation reserve



(1,343)

(1,559)

(1,150)

Retained earnings



(60,440)

(56,271)

(55,027)

Total equity attributable to owners of the parent company



57,552

61,505

63,158

Non-controlling interest



15,906

14,724

14,615

Total equity



73,458

76,229

77,773

LIABILITIES






Non-current liabilities






Loans and borrowings



138,855

217,513

283,707

Deriviative financial instruments



1,783

2,295

2,506

Deferred income tax



13,576

10,824

12,892

Total non-current liabilities



154,214

230,632

299,105

Current liabilities






Loans and borrowings



228,126

150,164

84,091

Trade and other payables



25,651

22,611

22,748

Current income tax



-

8

-

Total current liabilities



253,777

172,783

106,839

Total liabilities



407,991

403,415

405,944

Total equity and liabilities



481,449

479,644

483,717







 

The financial statements were approved and authorised for issue by the Board of Directors on 27 June 2013 and signed on its behalf by David Clark.

 

David Clark                                                                            

Director and Chairman

 

 

 

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

As at 31 March 2013

                                                                                   

 


Amount attributable to owners of the parent company



Share          Capital

Share Premium

Other Reserve

Translation Reserve

Retained
Earnings

Total

Non-controlling interest

Total


€'000

€'000

€'000

€'000

€'000

€'000

€'000

€'000










At 1 October 2011

6,080

  18,159

95,096

(1,476)

(52,149)

65,710

15,503

81,213

Comprehensive income:









Result for the year

        -

         -

        -

        -

     (2,878)

(2,878)

        (895)

(3,773)

Other comprehensive income:









Foreign exchange gains on translation of foreign operations

        -

         -

        -

     326

            -

326

            7

333

Total comprehensive income for the period

-

-

-

326

(2,878)

(2,552)

(888)

(3,440)

At 30 September 2012

6,080

18,159

95,096

(1,150)

(55,027)

63,158

14,615

77,773

Comprehensive income:









Result for the year

        -

         -

        -

        -

     (5,413)

(5,413)

      1,294

(4,119)

Other comprehensive income:









Foreign exchange losses on translation of foreign operations

        -

         -

        -

    (193)

            -

(193)

           (3)

(196)

Total comprehensive income for the period

-

-

-

(193)

(5,413)

(5,606)

1,291

(4,315)

At 31 March 2013

6,080

18,159

95,096

(1,343)

(60,440)

57,552

15,906

73,458










At 1 October 2011

6,080

  18,159

95,096

(1,476)

(52,149)

65,710

15,503

81,213

Comprehensive income:









Result for the year

        -

         -

        -

        -

     (4,122)

(4,122)

        (776)

(4,898)

Other comprehensive income:









Foreign exchange losses on translation of foreign operations

        -

         -

        -

     (83)

            -

(83)

           (3)

(86)

Total comprehensive income for the period

-

-

-

(83)

(4,122)

(4,205)

(779)

(4,984)

At 31 March 2012

6,080

18,159

95,096

(1,559)

(56,271)

61,505

14,724

76,229

 

 

 

 

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT

For the 6 months ended 31 March 2013



Note

6 months to   31 March 2013

6 months to   31 March 2012

Year ended      
   30 September 2012

 



(unaudited)

(unaudited)

(audited)

 



€'000

€'000

€'000

 

OPERATING ACTIVITIES





 






 

Loss for the period


(4,119)

(4,898)

(3,773)

 






 

Adjustments for :





 

Depreciation


27

38

62

 

Changes in fair value of investment property

5

4,056

6,101

(571)

 

Impairment of financial assets

6

(12)

56

49

 

Finance income


(1,147)

(714)

(1,029)

 

Finance expense


11,206

11,345

21,896

 

Exchange translation movements


(193)

(86)

326

 

Taxation


690

(1,417)

653

 






 

Operating cash flows before movements in working capital


10,508

10,425

17,613

 






 

Movements in working capital :





 

(Increase)/decrease in operating trade and other receivables


(24)

99

317

 

Increase/(decrease) in operating trade and other payables


1,787

(2,416)

845

 






 

Cash generated from operations


12,271

8,108

18,775

 






 

Interest received


                 411

                 346

745

 

Interest paid


(7,982)

(8,554)

(20,430)

 

Taxation paid


(54)

(94)

(16)

 






 

Cash generated from operating activities


4,646

(194)

(926)

 






 

INVESTING ACTIVITIES





 






 

Purchase of investment properties


(301)

(2,341)

(3,998)

 

Purchase of property, plant and equipment


(15)

(44)

(48)

 

Loans advanced


(4)

(9)

-

 






 

Cash flows from investing activities


(320)

(2,394)

(4,046)

 






 

FINANCING ACTIVITIES





 






 

Drawdown of bank loans including costs


5,814

5,674

 

Drawdown of other loan borrowings


81

1,000

3,243

 

Bank loans repaid


(2,784)

(965)

(4,414)

 






 

Cash flows from financing activities


(2,703)

5,849

4,503

 

Increase/(decrease) in cash and cash equivalents


1,623

3,261

(469)

 

Net foreign exchange losses on cash and cash equivalents


(155)

(421)

(85)

 



1,468

2,840

(554)

 

Cash and cash equivalents at start of period


11,631

12,185

12,185

 


13,099

15,025

11,631

 

 






NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. GENERAL INFORMATION

 

The Company is a limited liability, closed-ended investment company incorporated in Guernsey. The shares of the Company have been admitted to trading on the Alternative Investment Market (AIM) of the London Stock Exchange.

 

The Company invests in commercial property in Central and Eastern Europe which is held through its subsidiary companies. The unaudited condensed interim consolidated financial statements of the Company for the period ended 31 March 2013 comprise the financial statements of the Company and its subsidiaries (together referred to as the "Group").

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

a. Basis of preparation

 

The principle accounting policies adopted in the preparation of the unaudited condensed interim consolidated financial statements are set out below.

 

The unaudited condensed interim consolidated financial statements have been prepared using the recognition and measurement principles of International Financial Reporting Standards (IFRS) as adopted in the European Union.

 

These interim financial statements are unaudited but have been reviewed by the auditors whose review report is set out below.

 

The same accounting policies, presentation and methods of computation are followed in these interim consolidated financial statements as those followed in the preparation of the Group's annual financial statements for the year ended 30 September 2012 and which are expected to be applied for the consolidated financial statements for the year ending 30 September 2013.

 

The report of the auditors on the financial statements for the year ended 30 September 2012 was unqualified but did include references to an emphasis of matter in respect of:

 

(a)   the going concern of the Group which arose from its need for further working capital in the foreseeable future together with the breach of certain banking covenants and the possibility of further loan covenant breaches given the current trading environment and the effects it is having on rental income levels and future property values, thus requiring the support of the lending banks for the ongoing and future development of the Group.

(b)  the valuations of investment properties which were based on various assumptions and limiting conditions, many of which are difficult to assess.

 

Going Concern

The unaudited condensed interim consolidated financial statements have been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due, for the foreseeable future.

The outstanding breaches of certain loans, notably with Proton Bank, KBC Bank (Sibiu 1) and the syndicate of banks EFG, Bank of Greece, Bank of Cyprus and Bank Romaneasca (Era Oradea) for non-payment of loan amounts falling due gives the right to the lending banks to accelerate the repayment of the debt which if effected would impact the going concern of the Group. However, the Company is in on-going discussions with the banks concerned with a view to reaching a consensual agreement or restructuring of these debts.

The continued subdued trading conditions in the local markets in which the Group operates requiring the continued need to grant material tenant discounts has resulted in reduced project level cash flows which the Investment Manager has sought, and continues to seek, to alleviate by renegotiating where possible existing bank loan facilities to minimise short term cash commitments whilst rental income stabilises and tenant discounts can be phased out.

 

While these actions have helped to improve the immediate and future cash position, the cash flow forecasts prepared by the Investment Manager for the next 12 months indicate that the Group requires additional working capital for the foreseeable future; this requirement is currently being provided by the Investment Manager or funds advised by a fellow subsidiary of the Investment Manager's parent company. Firstly, by its agreement to accept extended payment terms of its management fee as and when it becomes due to align settlement to the cash flow availability within the Group; secondly, in providing a short term loan facility to assist with specific bank funding needs and thirdly, by providing an undertaking to provide additional working capital over the next 12 months, as and when this is required.

 

In order to meet the liabilities and those specifically falling due to the Investment Manager's and/or its related companies' provision of ongoing support to the Group, as well as to enhance working capital, the Company is looking at a number of sources including asset sales, additional or further restructuring of bank borrowings and the  issue of additional equity capital.

 

In reviewing the forecasts the Directors have taken into account material risks and uncertainties, which in addition to those outlined above regarding the successful conclusion to the Proton Bank KBC Bank and the syndicate of banks EFG, Bank of Greece, Bank of Cyprus and Bank Romaneasca discussions, also include the following:

·  Certain surplus cash funds held in project subsidiary companies required for use of the Group's working capital needs in general requires the approval of the specific lending banks financing these projects.

·  The continuing uncertain trading environment and its impact on tenants and their ability to pay their contractual rent obligations in a timely manner. With tenant negotiations ongoing the continued downward pressure on rental income continues to impact on certain bank loan covenants and this will require further negotiation and ongoing support of the Group's lending banks.

·  The ability to attract key tenants and further lease available tenant space is dependent on being able to provide fit-out incentives which requires funding support by the existing lending banks.

The above represents a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern. In the Directors' view discussions are continuing on the above satisfactorily and they have therefore concluded that it is appropriate to prepare these financial statements on a going concern basis.  The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

The condensed financial statements are presented in euros and all values are rounded to the nearest thousand (€'000) except when otherwise indicated.

 

The financial information summarised does not constitute statutory accounts.

 

b. Basis of consolidation

 

The consolidated financial statements incorporate the results of the Company and entities controlled by the Company (its subsidiaries) made up to 31 March 2013. Control exists where the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All inter-company loan balances, interest charges and investments are eliminated on consolidation.

 

The financial statements of the subsidiaries are prepared for the same reporting period as the Company. The accounting policies are applied consistently throughout the Group.

 

3. EARNINGS PER SHARE

 

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

 


31 March 2013

31 March 2012

30 September 2012


           €'000

           €'000

           €'000





Net loss attributable to shareholders of the parent

(5,413)

(4,122)

(2,878)






number

number

number

Weighted average number of ordinary shares in issue

608,041,718

608,041,718

608,041,718






        €

        €

        €

Basic earnings per share

(0.009)

(0.007)

(0.005)

 

The Company has no dilutive potential ordinary shares. The diluted earnings per share are the same as the basic earnings per share.

 

4. NET ASSET VALUE PER SHARE

 

The Net Asset Value per share is based on shareholders' equity at the period end as follows:

 


31 March 2013

31 March 2012

30 September 2012


           €'000

           €'000

           €'000





Net Asset Value

57,552

61,505

63,158





Add back deferred tax provision attributable to equity shareholders

10,960

8,519

10,622





Adjusted Net Assets

68,512

70,024

73,780













Number of ordinary shares in issue

608 million

608 million

608 million













Net Asset Value per share

 €0.0947

 €0.1012

 €0.1039





Adjusted Net Asset Value per share

 €0.1127

 €0.1152

 €0.1213





 

The adjustment added back to arrive at the Adjusted Net Asset Value has been made to reflect the likely value of the Group given that the deferred tax liability provided is unlikely to crystallise in full as the Group is likely to dispose of the property holding companies rather than the properties themselves.

 

5. INVESTMENT PROPERTY

 


31 March 2013

31 March 2012

30 September 2012


       €'000

       €'000

          €'000

Fair value








At start of period

437,833

433,264

433,264

Capital expenditure during the period

302

2,476

3,998

Fair value (write down)/uplift

              (4,056)

              (6,101)

571





At end of period

434,079

429,639

437,833









Adjustment from market value to fair value








Market value

446,304

440,186

449,512

Adjustment for rent recognised in advance

(12,225)

(10,547)

(11,679)





At end of period

434,079

429,639

437,833






Suceava Shopping City

Sibiu Shopping City

Era Shopping Park, Oradea

Era Shopping Park, Iasi

Riviera Shopping City

Iasi Land

Chisinau Land

Nikolaev Land

Total

Location

Romania

Romania

Romania

Romania

Ukraine

Romania

Moldova

Ukraine


Type of Asset

Commercial retail

Commercial retail

Commercial retail

Commercial retail

Commercial retail

Development land

Development land

Development land



          €'000

          €'000

          €'000

          €'000

          €'000

          €'000

          €'000

          €'000

          €'000

Fair value at 1 October 2011

63,739

114,012

79,529

81,014

83,676

8,037

2,509

748

433,264

Capital expenditure on construction and development

-

455

1,955

-30

96

-

-

-

2,476

Net gain from fair value adjustments of investment property

(2,998)

(1,974)

(2,501)

(2,080)

3,530

(78)

-

-

(6,101)

Fair value at 31 March 2012

60,741

112,493

78,983

78,904

87,302

7,959

2,509

748

429,639











Capital expenditure on construction and development

-

544

475

64

432

-

7

-

1,522

Net gain from fair value adjustments of investment property

307

818

(1,826)

(4,167)

12,489

(799)

(16)

(134)

6,672

Fair value at 30 September 2012

61,048

113,855

77,632

74,801

100,223

7,160

2,500

614

437,833











Capital expenditure on construction and development

1

200

61

31

9

-

-

-

302

Net gain from fair value adjustments of investment property

2,756

(4,027)

(2,516)

(1,007)

738

-

-

-

(4,056)

Fair value at 31 March 2013

63,805

110,028

75,177

73,825

100,970

7,160

2,500

614

434,079











Adjustments from market value to fair value










Market Value

62,517

114,082

80,053

80,098

92,220

7,959

2,509

748

440,186

Adjustment for rent recognised in advance

(1,776)

(1,589)

(1,070)

(1,194)

(4,918)

-

-

-

(10,547)

Fair value at 31 March 2012

60,741

112,493

78,983

78,904

87,302

7,959

2,509

748

429,639











Market Value

62,340

115,070

79,280

76,510

106,038

7,160

2,500

614

449,512

Adjustment for rent recognised in advance

(1,292)

(1,215)

(1,648)

(1,709)

(5,815)

-

-

-

(11,679)

Fair value at 30 September 2012

61,048

113,855

77,632

74,801

100,223

7,160

2,500

614

437,833











Market Value

64,620

111,870

77,170

75,900

106,470

7,160

2,500

614

446,304

Adjustment for rent recognised in advance

(815)

(1,842)

(1,993)

(2,075)

(5,500)

-

-

-

(12,225)

Fair value at 31 March 2013

63,805

110,028

75,177

73,825

100,970

7,160

2,500

614

434,079

 

 

The market value of the Group's investment properties at 31 March 2013 has been arrived at on an open market value basis, carried out by independent professionally qualified valuers, Cushman & Wakefield, in accordance with the requirements of the  Appraisal and Valuation Manual, 8th Edition published by the Royal Institution of Chartered Surveyors.

 

Open market value is determined by reference to market based evidence, which is the amount for which the asset could be exchanged between a knowledgeable willing buyer and seller, in an arms' length transaction. The valuation methodology involves the discounted cash flow of the future rental income streams and a reversionary value discounted to a present value estimate. It also includes an assessment of open market transactions within the specific asset region.

 

The fair values of investment property at 31 March 2013, 31 March 2012 and 30 September 2012 have been adjusted from the valuations reported by the external valuers for the effects of tenant lease incentives incurred and accounted for in accordance with IAS 17. As the investment property valuations take into account all rental streams including lease incentives an adjustment is made as the related tenant lease incentive asset is separately disclosed as part of trade and other receivables.











 

6. LOANS RECEIVABLE

 


31 March 2013

31 March 2012

30 September 2012


       €'000

       €'000

          €'000





Loans receivable

11,536

11,429

11,503

Less: provision for impairment of loans receivable

(1,250)

(1,230)

(1,223)





Total

10,286

10,199

10,280









Non-current portion

1,056

969

1,050

Current portion

9,230

9,230

9,230





Loans receivable

10,286

10,199

10,280





 

The loans receivable comprise:

 

Moldova subsidiary loans receivablerepresenting advances and related accrued interest for the purpose of purchases of two plots of land in Moldova of 2.1m (2012:2.3m). The loans are secured on these land plots in a mortgage agreement. The Moldovan loans bear interest at the rate of 6% and are repayable by November 2016. Valuations have been carried out by independent valuers, Cushman & Wakefield, on the related land assets as a result of which provision has been made of €1.3m (2011:1.2m) for the shortfall between the fair value of the secured land assets and the loans receivable.

 

Cyprus subsidiary loan receivablerepresenting an amount of 9.2m (2011: 9.2m held in Romanian subsidiary) that is unsecured.  This loan does not bear interest (2012: interest rate of 3 month Euribor plus a margin of 1.75%) and is repayable by July 2013.

 

7. SHARE CAPITAL AND PREMIUM

 


 No. of shares

Share capital

Share premium

Total


millions

            €'000

            €'000

            €'000






At 31 March 2013

608

6,080

18,159

24,239






At 31 March 2012

608

6,080

18,159

24,239






At 30 September 2012

608

6,080

18,159

24,239

 

The total number of authorised shares is 1 billion (2012: 1 billion) with a par value of €0.01 each (2012: €0.01 each). All issued shares are fully paid.

 

The Company has only one class of ordinary shares which carry no right to fixed income.

 

8. RELATED PARTY TRANSACTIONS

 

The Group is managed by its Board of Directors, who as the only management of the Company, received fees for their services. The total charge to the income statement during the period of €0.04m (2012: €0.06m) comprises fees and related expenses due to the Directors of both the Company and the Group's subsidiaries, including those outstanding at the period end.

 

Under an agreement with the Company, Argo Capital Management Property Limited provides property investment advisory and property management services to the Group, and is considered a related party by way of its ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Furthermore, Argo Capital Management Property Limited is a wholly owned subsidiary of Argo Group Limited which through one of its subsidiaries manages Funds that acquired a major interest in the shares of the Company arising from the issue of new ordinary shares.

 

During the period the Company incurred management fees of €1 million (2012: €1 million) due to Argo Capital Management Property Limitedof which €2.7 million (2012: €2.2 million) is accrued or owing at the period end. To assist the cash flow of the Group, the Manager has not sought settlement of management fees as they have fallen but rather has conceded extended credit terms.

 

During the period Argo Special Situations Fund LP lent a further €0.27 million to the Company by way of an additional advance related to an existing loan agreement. Argo Special Situations Fund LP is managed by Argo Capital Management Cyprus Limited which is a wholly owned subsidiary of Argo Group Limited and as such is an associate of the Manager. Argo Capital Management Cyprus Limited has full discretionary control over Argo Special Situations Fund LP and retains all voting rights over the investments in the portfolio.

 

9. EVENTS AFTER THE BALANCE SHEET DATE

 

Bank Financing

 

Since the period end North Asset Management Sarl a subsidiary of the Manager, Argo Capital Management Property Limited, has lent €1.0 million to a subsidiary of the Group in order to cure the event of default that occurred under the KBC loan agreement (Sibiu 2). The loan is repayable on demand and bears annual interest at the rate of 12%.

 

INDEPENDENT REVIEW REPORT


 

Introduction

We have been engaged by the Argo Real Estate Opportunities Fund Limited (referred to as the "company" and together with its subsidiaries as "the Group") to review the unaudited condensed set of financial statements in the interim report of the Group for the six months ended 31 March 2013 which comprise the unaudited consolidated statement of comprehensive income, unaudited consolidated statement of financial position, unaudited consolidated statement of changes in equity, unaudited consolidated cash flow statement and the related explanatory notes to the unaudited consolidated financial statements.

We have read the other information contained in the report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the unaudited condensed set of consolidated financial statements.

Directors' responsibilities

The interim report is the responsibility of, and has been approved, by the directors.  The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market (AIM).

As disclosed in note 1 of the condensed set of financial statements for the six months ended 31 March 2013, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The unaudited condensed set of financial statements included in the interim report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the unaudited condensed set of financial statements in the interim report based on our review.

Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose.  No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Auditing Practices Board for use in the United Kingdom and Ireland.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the unaudited condensed set of financial statements in the interim report for the six months ended 31 March 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union, with the London Stock Exchange's AIM rules for companies and other applicable legislation and regulations.

Emphasis of Matter

 

In arriving at our review conclusion, which is not qualified, we draw your attention to the following matters: 

 

a) Going Concern

 

We have considered the adequacy of the disclosures made by the Directors in the Basis of Preparation note 2a concerning the Group's ability to continue as a going concern.  These disclosures identify, amongst other factors, the reliance on the Investment Manager or related companies to the Investment Manager to provide continued financial support to the Group, the on-going support of the lending banks where risks to a breach of terms is possible under the current trading environment and the on-going support of lending banks where loans are due to expire within the next twelve months. These represent material uncertainties which may cast significant doubt on the Group's ability to continue as a going concern.  The condensed set of financial statements in the interim report does not include the adjustments that would result if the Group was unable to continue as a going concern.

 

b) Valuation of investment properties

 

The valuation of the investment properties as disclosed in note 5 are based on various assumptions and limiting conditions, many of which are difficult to assess. The jurisdictions in which the Group is operating are severely affected by the global economic crisis and any future estimated cash flows from such investments are affected by judgments related to the recoveries of these jurisdictions from the economic crisis. In the event that these assumptions, judgements or limiting factors do not materialise as expected, then the valuations contained in the financial statements may not reflect the actual amounts realised.  The impact of such adjustments to the Group's financial results and position cannot be readily quantified.

 

 

Baker Tilly CI Audit Limited

Chartered Accountants

St. Sampson, Guernsey

 

27 June 2013

 

 

 

 


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