Consolidated annual report 2013

Transcription

1 Consolidated annual report 2013 EfTEN Kinnisvarafond AS Registry code: Beginning of the accounting year: End of the accounting year: Address: A. Lauteri 5, Tallinn address: Web address:

2 EfTEN Kinnisvarafond Management report Contents MANAGEMENT REPORT Financial overview Real estate portfolio Investment properties in 2013 Assessment of investment properties Sale of investment properties Information on shares Prospects for 2014 Market analysis and prospects on the commercial property market Management ANNUAL ACCOUNTS OF THE CONSOLIDATION GROUP Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of cash-flows Consolidated statement of changes in equity Notes to the annual accounts of the consolidation group 1 General information 2 Statement of compliance and general principles of preparing the accounts 2.1 Changes in the accounting policies and presentation 2.2 Summary of the most important accounting principles 3 Subsidiaries and joint ventures 4 Revenue 5 Property operating expenses 6 Marketing costs 7 Administrative expenses 8 Other incomes and other expenses 9 Financial expenses 10 Cash and cash equivalents 11 Receivables and accrued income 12 Investment properties 13 Property, plant and equipment 14 Loan liabilities 15 Derivative instruments 16 Short-term payables and prepayments 17 Success fee liability 18 Financial instruments, management of financial risks 19 Share capital 20 Contingent liabilities 21 Transactions with related parties 22 Parent s unconsolidated income statement 23 Parent s unconsolidated balance sheet 24 Parent s unconsolidated statement of cash-flows 25 Parent s unconsolidated statement of changes in equity 26 Group s structure as at Profit distribution proposal Signatures of the members of the board and supervisory board to the annual report of 2013 Distribution of revenue in accordance with the Classification of Economic Activities Independent auditor s report

3 EfTEN Kinnisvarafond Management report Financial overview The consolidated sales revenue of EfTEN Kinnisvarafond AS in 2013 was EUR 10,225 million, growing by 90% in the year. The net profi t of the Group at the same period was EUR 10,210 million and it increased 2.2 times compared to In 2013, the total net profi t comprised net profi t from revaluation of investment properties (profi t from revaluation of investment properties minus change in the success fee liability reserve) in the amount of EUR 3.9 million (2012: EUR 1.5 million). The consolidated gross profi t margin in 2013 was 92% (2012: 90%), therefore, expenses directly related to management of properties (incl. land tax, insurance, maintenance and repair costs) made up 8% of the revenue in 2013 (2012: 10%). Based on this indicator, EfTEN Kinnisvarafond is the most business-effi cient real estate fund in the Baltics. The expenses related to properties, marketing costs, general expenses, other income and expenses made up 20.7% of the revenues in In 2012, this indicator was 20.3%. It has dropped a little due to an increase of the share of shopping centres in the portfolio and their higher marketing costs. EfTEN Kinnisvarafond is the most business-effi cient real estate fund in the Baltics. in mill. Rental revenue, other revenues from investment properties Expenses related to investment properties, incl. marketing costs ,225 5,394-0,996-0,582 Net financial expenses -1,677-1,093 Net rental revenue minus financial expenses 7,552 3,719 Management fees -0,840-0,443 Other revenues and expenses -0,283-0,069 Profit before change in the value of investment property and income tax expense1 6,429 3,207 1 Change in the value of investment properties also includes sales profi t from investment properties. 3

4 EfTEN Kinnisvarafond Management report The volume of the Group s assets as at was EUR 167,099 million ( : EUR 88,763 million), incl. the fair value of investment properties that made up EUR 146,786 million from the total assets ( : EUR million). The gross assets value of EfTEN Kinnisvarafond is the highest among the commercial property funds operating exclusively in the Baltic States in mill. Investment properties 146,786 75,545 Other long-term assets 0,344 0,006 Current assets, excl. cash 0,654 0,524 Net payables -66,321-31,942 Net asset value (NAV) 81,463 44,133 NAV per share, in cents 2,0161 1,7613 Through issuance of shares, the Group added additional funds in the amount of EUR 28.3 million in 2013, from which an uninvested capital remained by the end of the year in the amount of EUR 13 million. The net asset value of a share of EfTEN Kinnisvarafond AS increased by 14% in a year due to rental income from new investments, low interest rates, and effective cost management. Return on invested capital (ROIC) in 2013 was 21.2% (2012: 25.6%). This indicator decreased in 2013 because all the proceeds received from issuing of shares could not be invested in When to eliminate the part that was not invested in the accounting period, the ROIC in 2013 would have been 27.1% (2012: 26,3%). The growth of competitiveness of the Group is supported by access to fl exible fi nancing conditions. In 2013, the Group partially refi nanced the existing loans and thus received additional funds for investing in the amount of EUR 4.9 million. The average interest rate of the Group s loan agreements as at the end of the year is 2.1% and the LTV (Loan to Value) 56%. In relation to completion of development activities, LTV is estimated to increase in the spring of 2014 to 59%, but it will fall back to the level of the end of 2013 by the end of the year. Return on invested capital (ROIC) in 2013 was 21.2% The dividend policy of EfTEN Kinnisvarafond AS foresees that the Group will pay 80% of the available cash fl ow to shareholders as (gross) dividends each accounting year. In 2013, EfTEN Kinnisvarafond AS paid out (net) dividends to shareholders in the amount of EUR 1.4 million, that are 5.59 cents per share. In 2014, the management of EfTEN Kinnisvarafond AS will propose paying (net) dividends in the amount of EUR 2.44 million that is 6.05 cents per share. In addition, in relation to successful exits of two investment projects, the management will propose to the general shareholders meeting to reduce the share capital of EfTEN Kinnisvarafond AS by EUR 2.1 million in 2014, which would increase the pay out to shareholders by additional 5.2 cents per share. Per annum or as at December ROE, % (net profit of the period / average equity of the period) 16,3 16,1 ROA, % (net profit of the period / average assets of the period) 8,0 6,7 ROIC, % (net profit of the period / average invested capital of the period1) 21,2 25,6 DSCR (EBITDA/(interest expenses + scheduled loan payments) 1,9 2,0 1 The average invested capital of the period is the paid-in share capital of EfTEN Kinnisvarafond AS s equity, and the share premium accounts. It does not consider the actual investment of the funds involved as equity. 4

5 Management report EfTEN Kinnisvarafond Real estate portfolio The Group invests in commercial property with a strong and long-lasting tenant base. As at the end of 2013, the Group had 21 commercial investment properties with a fair value as at the balance sheet date is EUR million and the acquisition cost EUR million. The real estate portfolio of the Group divides as follows between sectors: retail premises 50.7%; 7 investments office premises 25.6%; 7 investments logistics and production premises 18.0%; 5 investments other (hotel and governmental) 5.7%; 2 investments The weighted average duration period of the rental agreements on the investment properties is 6.1 years and as at , the Group had a total of 173 lessees. 71.5% of the consolidated rental revenue is the contractual revenue of 12 clients. Properties Office building at Pärnu rd. 105 in Tallinn. More widely known as the office building of Äripäev % of the consolidated rental revenue Prisma Peremarket 20,1 Rautakesko AS 12,7 Eesti Energia 7,1 Logistika Pluss 6,6 Riigi Kinnisvara 5,1 Premia Tallinna Külmhoone 4,9 Kinnisvaravalduse (RIMI) 3,2 Arvato Services Estonia 2,8 Äripäev 2,8 HANZA Mechanics Tartu 2,1 Stora Enso Packaning AS 2,1 Mediq Eesti AS 2,0 Others 28,5 (Estonian biggest business daily) As at the end of 2013, the Group had 21 commercial investment properties. 5

6 EfTEN Kinnisvarafond Management report Completed investment properties, as at Group interest Net rental surface Rental revenue per annum Occupancy, % Tallinna Külmhoone 100 6, Võru Rautakesko 100 3, Lepa Centre 50 4, UKU Centre 100 5, Rakvere Police Building 100 5, Lauteri , Ülikooli , Pärnu mnt ,216 1, Pärnu mnt , Mustika Centre ,538 2, Narva Prisma ,361 1, Laki , Kadaka tee , Stabu 10 office building 100 3, Piirimäe 10/10a 100 5, Kungla , Kuuli 10/Punane , Tammsaare tee Rautakesko 100 9,120 1, Silikaadi 6/ ,

7 EfTEN Kinnisvarafond Management report Investment properties in has been the most active investment year in the history of the Group. When in the period of the Group made a total of 12 real estate investments, then in 2013 alone the fund made 11 new investments, incl. two fi rst investments into objects located in the Republic of Latvia. The total cost of investment properties and acquisition of subsidiaries in 2013 was EUR 56 million. Together with investments into the projects under development, the Group invested a total of EUR 64.4 million in a year. The net entrance yield of the 2013 investments on completed (rental revenue producing) investment properties was between 8.2% and 9.5%, and the annualized rental revenue of these projects is a total of EUR 3.15 million. In order to fi nance the investment activity, the Group took bank loans in the total amount of EUR 32.8 million in 2013, with the weighted average interest margin of 1.9% and deadlines in Due to continuation of low interest policy, increased interest in investment, and the improved market liquidity, the yield level in the commercial property sector has decreased steadily. In order to ensure better yield to its investors, the Group continues to have commercial property development projects. According to the Group strategy, the volume of investment properties under development (acquisition of a registered immovable + expected investment to the entire development activity) may not exceed 25% of the total volume of assets of the Group. The assumption for suitable projects is the existence of a detailed plan and an anchor tenant. In 2013 the Group invested a total of EUR 64.4 million. The most important development project of 2013 was rebuilding of Mustika shopping centre according to a new concept in Mustamäe, Tallinn. The Mustika centre is the largest single investment of the Group, the acquisition cost (purchasing of the property + rebuilding) of EUR 30 million. The centre was opened on 28 November 2013 and the fi rst month of its operation met the expectations of the management. The rent level of Mustika centre today is approximately 2 times lower than the one in the competing centres, which also indicates the future potential of the centre. Having undergone extensive renovations Mustika Centre in Mustamäe, Tallinn was opened for visitors. Mustika Centre is the fund s largest single investment. 7

8 EfTEN Kinnisvarafond Management report As at the beginning of the year, the Group continued the development of two investments: Investment properties under development, as at Group interest Net rental surface Time of completion Value on balance sheet as at , thousands of EUR Investments added until completion Palace Hotel 50 4,870 2Q ,361 5,000 Jelgava shopping centre 100 4,450 3Q ,142 3,000 A new shopping centre at Rigas iela 48, Jelgava will be completed in July The anchor tenant of the centre is RIMI who is renting 58% of the net area. A completely renewed Palace Hotel will open its doors in June The hotel is managed by TallinnHotels and this investment has been made together with AS Esraven. Valuation of investment properties EfTEN Kinnisvarafond revalues its investment properties semi-annually in June and in December. Investment properties aggregate fair value did not change as a result of the fi rst half of 2013, but as at the end of the year, the value of investment properties increased by a total of EUR 4.9 million. The total value of investment properties increased by 3.4% as a result of revaluation (2012: 2,6%) The Group values the investment properties individually, using a discounted cash fl ow method. The estimations of the cashfl ows of all objects have been updated in fi nding the fair value, and the discount rates and exit yields have been differentiated depending on the location of the objects, their technical condition, and the tenant risk level. Considering the changes in the commercial property market of the Baltic States and the favourable fi nancing conditions, the exit yields by objects has decreased by 0.1% 0.7%, staying in the range of 8.0% - 9.5%. The cash-fl ow discount rates have decreased for the same reason, staying in the range of 10.2% 10.5% depending on the object quality level. We are planning to increase our investments in Latvia and, if a suitable project is found, we will start investment activities in Lithuania According to the estimated updated rental revenue, the net yield based on the expected net rental revenue in 2014 will be 8.44%. Considering the increased liquidity on the commercial property market of the Baltic States, as well as the decreased yield levels, the portfolio will also have a potential for growth in the asset value in the future. From the investment properties of the Group so far, the one of the best investment has been a 2010 investment into the Rakvere police and rescue building, for which the net yield on the initial investment, based on the expected net cash-fl ow in 2014, is 11%. It is followed by the section of logistics and production premises with a 9.5% net yield, closely followed by the segment of retail premises, the expected net yield to the acquisition cost of investments in 2014 resulting in a 9.2%. The respective yield level of the offi ce segment has been 8.8%. 8

9 EfTEN Kinnisvarafond Management report Sale of investment properties The Group sold two investment properties in Tallinn in The sales price of investment properties totalled EUR 4.8 million and upon sale of the properties, bank loans were repaid in the total amount of EUR 1.6 million. A summary of the sale of the two investment properties is as follows: Narva mnt 59, Tallinn Lõkke 4, Tallinn Time of acquisition Holding period, in years 2,2 4,3 Capital invested, Equity return on an annual basis (post success fee) 18% 44% Equity return multiplier 1,4 2,9 The Group will continue selling smaller investment properties in Information on shares As at , payments have been made to the share capital of the Group in the total amount of EUR million ( : EUR million). In 2013, EfTEN Kinnisvarafond went through two shares issuing, thus including EUR million for investment. In 2012, a total of EUR million of funds were added with issuance of shares Number of shares at the beginning of the period 25,057,010 8,393,059 6,830,559 Issue of shares 15,348,596 16,663,951 1,562,500 Number of shares at the end of the period 40,405,606 25,057,010 8,393,059 NAV per share 2,2000 2,0000 1,8000 1,6140 1,7613 2,0161 1,6000 1,4000 1,2315 1,2000 1,0123 1,0000 0,8000 0, NAV per share, 2,0161 1,7613 1,6140 1,2315 1,0123 0,6000 Increase in annual NAV 14% 9% 31% 22% 69% - Increase in NAV, 2 years 25% 43% 59% 105% - - Increase in NAV, 3 years 64% 74% 169% Increase in NAV, 4 years 99% 194% Increase in NAV, 5 years 236%

10 EfTEN Kinnisvarafond Management report Largest shareholders of EfTEN Kinnisvarafond AS as at Osalus aktsiakapitalis, % LHV pension funds 31,7 Danske pension funds 16,7 Ambient Sound Investments OÜ 6,3 ERGO pension funds 5,0 Others 40,4 Prospects for 2014 The primary task of the management company of EfTEN Kinnisvarafond AS is to complete the unfi nished development projects. A completely renewed Palace Hotel is planned to be opened in June A month later, a new shopping centre in Jelgava is planned to open its doors. With that, all the current development projects of the Group are completed and the opened development positions closed. Based on the current history of the Group it can be concluded that the yield level of development projects has been on the average 1.5 percentage points higher than the one of developed buildings. Therefore, the Group aims at increasing the development position by investing into buildings that need a turn around strategy or land units, which already have a detailed plan, and binding lease contracts. In case of developed buildings, the main focus is on increasing the net rental revenue by indexing the rent rates and replacing the clients with lower rent rates with the ones with the higher rates. The gross profi t rate of the Group in 2013 was 92% (2012: 90%). This indicator is about 85% on average for the direct competitors of the fund. We are satisfi ed with the current effi ciency indicators, but aim at achieving an even better result in As at , the Group has available cash reserves in the amount of EUR 19.3 million. These funds include an uninvested capital in the amount of EUR 13 million, allowing to make new investments in a gross amount of up to EUR 40 million. Investment speed is not an aim in itself for the Group and new investments are made only in case of suitable investment projects. The selective exit strategy will continue in 2014 with an aim of increasing the value of an average single investment the plan is to sell smaller single investments and make new investments, the volume of which per investment exceeds the limit of EUR 10 million. Considering the macro-economic developments in the three Baltic States, the aim of the fund is to increase investments in Latvia. The management of the Group also does not rule out a possibility of initiating investment activities in the Republic of Lithuania if the investment object suitable for the fund s criteria is found. Another share issue is planned in the second half of the year to involve new equity and fi nance continuous growth. In 2014, we are increasing our investments in Latvia and we are open to new investment opportunities in Lithuania. 10

11 EfTEN Kinnisvarafond Management report Market analysis and prospects on the commercial property market Since no great changes are expected in 2014 in the economic environment and the current interest policy of the European Central Bank, there is a reason to believe that there will be a stable year in the sector of commercial property, rather characterized by sideways movement than fast growth. In no commercial property sector (incl. retail, offices, warehouses) is the rental demand high enough to significantly increase the rental rates compared to the current level. Latvia has become an increasingly attractive target market for investment properties. After joining the euro zone and carrying out efficient economic reforms, Latvia has the fastest growth potential in the Baltic States. According to the Colliers assessment, two times more commercial property investments were made in Latvia in 2013 than in The total volume of transactions in Latvia was EUR million. In Estonia, the respective number was less than the total volume in According to the Colliers assessment, commercial property transactions made in Estonia in 2012 amounted to EUR 210 million. This trend can be expected to continue also in 2014, since investments in Latvia are considered more attractive than the ones in the Estonian commercial property market. Attractive Latvia by having joined the Euro area and making successful economic reforms, our southern neighbour has become the Baltic state with the biggest growth potential. The main market participants in the Baltic States will continue to be the same investors as in Currently there is no information on creation of a new commercial property fund on the Baltic market or an increased interest in the region by an institutional investor of some foreign state. It keeps the liquidity of the larger transactions constant. Commercial property investments in the range of EUR 1 3 million are significantly more liquid. It is a suitable investment range for several private investors both in the Baltic States and abroad, mostly those from the East. Office building at Pärnu rd. 102C, Tallinn. Office building across the road from the Äripäev s office building. Pärnu mnt 102C is the largest investment in office segment. 11

12 EfTEN Kinnisvarafond Management report Management The supervisory board of EfTEN Kinnisvarafond AS gathered on six occasions in 2013 and on two occasions, decisions were taken without summoning the meeting. The fund s supervisory board provides the management board with instructions on how to manage the fund based on the provisions of the articles of association, including approving the budget, the strategy for action, and other important changes in the fund s activities. The supervisory board is also in charge of giving the management board their approval for transactions not falling under regular business activities. There were two general meetings for shareholders in At a general meeting on 5 April 2013, the fund s shareholders unanimously decided to add a version of the new statutes to the articles of association, the most important amendment was extension of the fund s deadline until 2022 and increasing the share capital. On a second, extraordinary general meeting of shareholders on 14 October 2013 the shareholders decided to carry out a new issuing of shares. There are eight members in the fund s supervisory board: Arti Arakas (chairman of the board), Jaan Pillesaar, Siive Penu, Laire Piik, Sander Rebane, Martin Hendre, Tauno Tats, and Rain Lõhmus. The fund s management board has two members: Viljar Arakas (fund manager) and Tõnu Uustalu (fund s investments manager). In accordance with the property administration contract, EfTEN Capital AS manages the activity of EfTEN Kinnisvarafond as a management company. As at , four employees worked in the Group ( : three employees) who received a total remuneration with taxes in 2013 in the amount of EUR 94 thousand (2012: EUR 31 thousand). No remunerations were accounted or paid to the members of the Management or Supervisory Board. Viljar Arakas Member of the Board 12

13 Annual accounts of the consolidation group CONSOLIDATED INCOME STATEMENT Notes Sales revenue 4 10,225 5,394 Property operating expenses Gross profit 9,407 4,877 Marketing costs Administrative expenses 7-2, Other income 8 5,588 1,969 Other expenses Operating profit 12,263 5,848 Finance income Financial expenses 9-1,693-1,103 Profit before income tax 10,586 4,755 Income tax expense on dividends Net profit of the accounting year 10,210 4,650 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Notes Net profit of the accounting year 10,210 4,650 Other comprehensive income: Revaluation profit / loss of hedge accounting instruments Other comprehensive income Total comprehensive income of the accounting year 10,426 4,852 13

14 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes ASSETS Cash and cash equivalents 10 19,314 12,687 Derivative instruments Receivables and accrued income Prepaid expenses 31 2 Total current assets 19,968 13,211 Long-term receivables Investment properties ,786 75,545 Property, plant and equipment Total non-current assets 147,130 75,551 TOTAL ASSETS 167,099 88,763 LIABILITIES AND EQUITY Loan liabilities 14 3,764 3,819 Derivative instruments Payables and prepayments Total short-term liabilities 4,617 4,559 Loan liabilities 14 78,616 38,764 Deposits received from tenants Success fee liability 17 2,104 1,092 Total long-term liabilities 81,019 40,070 Total liabilities 85,636 44,629 Share capital 19 24,243 15,034 Share premium 38,989 19,894 Mandatory capital reserve Hedge accounting reserve Retained earnings 20 17,750 9,173 Total equity 81,463 44,133 TOTAL LIABILITIES AND EQUITY 167,099 88,763 14

15 CONSOLIDATED STATEMENT OF CASH-FLOWS Notes Net profit 10,210 4,650 Net profit adjustments: Finance income and finance expenses 9 1,677 1,093 Revaluation profit/loss of investment properties 8-4,904-1,935 Profit/loss on sale of investment properties Change in the success fee liability 7 1, Depreciation and impairment of non-current assets Profit / loss from sale of non-current assets Income tax expense Total adjustments with non-monetary changes -2, Cash-flow from business operations before changes in working capital 8,161 4,301 Changes in receivables and liabilities related to business operations Total cash-flows from operations 8,062 4,288 Acquisition of property, plant and equipment Sale of property, plant and equipment 8 0 Acquisition of investment properties 12-52,576-41,361 Sale of investment properties 12 4,759 0 Acquisition of subsidiaries 3-11,807 0 Sale of business operations Interest received 5 10 Total cash-flows from investing activities -59,626-41,357 Loans received 37,711 28,837 Loan repayments on sale of investment properties -1,646 0 Scheduled loan repayments -2,628-1,439 Interest paid -1,771-1,152 Issuing of shares 19 28,303 21,740 Dividends paid -1, Income tax paid on dividends Total cash-flows from financing activities 58,196 47,487 TOTAL CASH-FLOWS ,417 Cash and cash equivalents at the beginning of the period 12, Change in cash and cash equivalents ,417 Influence of the change in exchange rate on cash and cash equivalents -5 0 Cash and cash equivalents at the end of the period 19,314 12,687 15

16 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital Share premium Mandatory capital reserve Hedge accounting reserve Retained earnings Total Balance ,036 3, ,071 13,546 Issuing of shares 9,998 16, ,241 Capital issue costs Announcement of dividends Transfers to mandatory capital reserve Total profit of the accounting year ,650 4,852 Balance ,034 19, ,173 44,133 Issuing of shares 9,209 19, ,303 Announcement of dividends ,400-1,400 Transfers to mandatory capital reserve Total profit of the accounting year ,210 10,426 Balance ,243 38, ,750 81,463 For additional information on share capital, see Note

17 NOTES TO THE ANNUAL ACCOUNTS OF THE CONSOLIDATION GROUP 1 General information The consolidated annual accounts of EfTEN Kinnisvarafond AS, its subsidiaries and the joint venture for the financial year ending on has been signed by the Management Board on 27 February In accordance with the requirements of the Commercial Code of the Republic of Estonia, the annual report compiled by the Management Board and approved by the Supervisory Board shall be confirmed at the general meeting of shareholders. These consolidated annual accounts form a part of the annual report to be confirmed by the shareholders, and are one of the bases on which profits shall be distributed. The shareholders have a right not to confirm the annual report prepared by the Management Board and approved by the Supervisory Board, and to request for a new report. EfTEN Kinnisvarafond AS (Parent company) is a company registered and operating in Estonia. The structure of EfTEN Kinnisvarafond AS Group as at has been provided in Note Statement of compliance and general principles of preparing the accounts The annual accounts of EfTEN Kinnisvarafond AS, its subsidiaries and the joint ventures, have been prepared based on the International Financial Reporting Standards (IFRS) as adopted by the European Union. These consolidated annual accounts have been prepared and submitted for approval in accordance with the requirements set in the Accounting Act of the Republic of Estonia and the Commercial Code, and to perform the liabilities therein. The annual report of the Group is presented in thousands of EUR. In the preparation of the financial reports, the method of acquisition cost has been taken as a basis, unless stated otherwise (for example, certain financial investments, derivative instruments and investment properties are stated in their fair value). 2.1 Changes in the accounting policies and presentation The accounting policies implemented are in accordance with the policies used in the last financial year, except the following changes due to amendments to the IFRS standards: Amendment to IAS 1 Financial Statement Presentation (amended). Presentation of Items of Other Comprehensive Income (OCI). This amendment changes the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group s financial position or performance. Since the Group has just one OCI item, the change to its presentation is minimal. Amendments to IAS 19 Employee Benefits (amended). These amendments range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. This amendment did not impact the financial statements of the Group, because the Group does not have material defined benefit obligations. Amendment to IFRS 7 Financial Instruments: Disclosures (amended). Offsetting Financial Assets and Financial Liabilities. The amendment introduces common disclosure requirements. These disclosures would provide users with information that is useful in evaluating the effect or potential effect of netting arrangements on an entity s financial position. This amendment 17

18 did not impact the financial statements of the Group, because the Group does not have netting arrangements. IFRS 13 Fair Value Measurement. The main reason of issuance of IFRS 13 is to reduce complexity and improve consistency in application when measuring fair value. It does not change when an entity is required to use fair value but, rather, provides guidance on how to measure fair value under IFRS when fair value is required or permitted by IFRS. The implementation of this standard did not have a material impact on the amounts recognised in these financial statements, however it resulted in additional disclosures (see Note 18). IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine. This interpretation applies to stripping costs incurred in surface mining activity during the production phase of the mine ( production stripping costs ). This interpretation had no impact on the Group s financial statements, as the Group is not involved in mining activity. Standards issued but not yet effective The Group has not applied the following IFRS and IFRIC interpretations that have been issued as of the date of authorization of these financial statements for issue, but which are not yet effective: Amendments to IAS 19 Employee Benefits (effective for financial years beginning on or after 1 July 2014, once endorsed by the EU). The amendments address accounting for the employee contributions to a defined benefit plan. Since the Group s employees do not make such contributions, the implementation of this amendment will not have any impact on the financial statements of the Group. Amendment to IAS 27 Separate Financial Statements (effective for financial years beginning on or after 1 January 2014). As a result of the new standards IFRS 10, IFRS 11 and IFRS 12 this standard was amended to contain accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 Separate Financial Statements requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. The implementation of this amendment will not have any impact on the financial statements of the Group. Amendment to IAS 28 Investments in Associates and Joint Ventures (effective for financial years beginning on or after 1 January 2014). As a result of the new standards IFRS 10, IFRS 11 and IFRS 12 this standard was renamed and addresses the application of the equity method to investments in joint ventures in addition to associates. The implementation of this amendment will not have any impact on the financial statements of the Group. Amendment to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for financial years beginning on or after 1 January 2014). This amendment clarifies the meaning of currently has a legally enforceable right to set-off and also clarifies the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The Group has not yet evaluated the impact of the implementation of this amendment. Amendment to IAS 36 Impairment of Assets (effective for financial years beginning on or after 1 January 2014). This amendment adds a few additional disclosure requirements about the fair value measurement when the recoverable amount is based on fair value less costs of disposal and removes an unintended consequence of IFRS 13 to IAS 36 disclosures. The amendment will not have any impact on the financial position or performance of the Group, however may result in additional disclosures. Amendment to IAS 39 Financial Instruments: Recognition and Measurement (effective for financial years beginning on or after 1 January 2014). The amendment provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The amendment will not have any impact on the financial position or performance of the Group, since it does not apply hedge accounting. 18

19 IFRS 9 Financial Instruments (currently no effective date, the standard is not yet endorsed by the EU). IFRS 9 will eventually replace IAS 39. The IASB has issued the first three parts of the standard, establishing a new classification and measurement framework for financial assets, requirements on the accounting for financial liabilities and hedge accounting. The Group has not yet evaluated the impact of the implementation of this standard. IFRS 10 Consolidated Financial Statements (effective for financial years beginning on or after 1 January 2014). IFRS 10 establishes a single control model that applies to all entities, including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled and, therefore, are required to be consolidated by a parent. Examples of areas of significant judgment include evaluating de facto control, potential voting rights or whether a decision maker is acting as a principal or agent. IFRS 10 replaces the part of IAS 27 Consolidated and Separate Financial Statements related to consolidated financial statements and replaces SIC 12 Consolidation Special Purpose Entities. The Group has not yet evaluated the impact of the implementation of this standard. IFRS 11 Joint Arrangements (effective for financial years beginning on or after 1 January 2014). IFRS 11 eliminates proportionate consolidation of jointly controlled entities. Under IFRS 11, jointly controlled entities, if classified as joint ventures (a newly defined term), must be accounted for using the equity method. Additionally, jointly controlled assets and operations are joint operations under IFRS 11, and the accounting for those arrangements will generally be consistent with today s accounting. That is, the entity will continue to recognize its relative share of assets, liabilities, revenues and expenses. The Group analyzed the impact of this standard to the financial statements as at , and as a result of implementation of the standard, the assets of the Group will decrease by a total of EUR 1,164 thousand, including EUR 305 thousand on cash and cash equivalents. This amendment has no impact on the Group s equity. IFRS 12 Disclosures of Interests in Other Entities (effective for financial years beginning on or after 1 January 2014). IFRS 12 combines the disclosure requirements for an entity s interests in subsidiaries, joint arrangements, investments in associates and structured entities into one comprehensive disclosure standard. A number of new disclosures also will be required such as disclosing the judgments made to determine control over another entity. The Group has not yet evaluated the impact of the implementation of this standard. Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment Entities (effective for financial years beginning on or after 1 January 2014). The amendments apply to entities that qualify as investment entities. The amendments provide an exception to the consolidation requirements of IFRS 10 by requiring investment entities to measure their subsidiaries at fair value through profit or loss, rather than consolidate them. The implementation of this amendment will not have any impact on the financial statements of the Group, as the parent of the Group is not an investment entity. Improvements to IFRS Effective for financial years beginning on or after 1 July In May 2012 IASB issued omnibus of necessary, but non-urgent amendments to the following standards: IFRS IFRS 1 First-time Adoption of International Financial Reporting Standards; IAS 1 Presentation of Financial Statements; IAS 16 Tangible assets; IAS 32 Financial Instruments: presentation; IAS 34 Interim Financial Reporting. Effective for financial years beginning on or after 1 July 2014, once endorsed by the EU. 19

20 In December 2013 IASB issued omnibus of necessary, but non-urgent amendments to the following standards: IFRS 1 First-time adoption of IFRS; IFRS 2 Share-based Payment; IFRS 3 Business Combinations; IFRS 8 Operating Segments; IFRS 13 Fair value Measurement; IAS 16 Property, Plant and Equipment; IAS 24 Related Party Disclosures; IAS 38 Intangible Assets; IAS 40 Investment property. The adoption of these amendments may result in changes to accounting policies or disclosures but will not have any impact on the financial position or performance of the Group. IFRIC Interpretation 21 Levies (effective for financial years beginning on or after 1 January 2014, once endorsed by the EU). This interpretation addresses the accounting for levies imposed by governments. Liability to pay a levy is recognized in the financial statements when the activity that triggers the payment of the levy occurs. The Group has not yet evaluated the impact of the implementation of this interpretation. The Group plans to adopt the above mentioned standards and interpretations on their effectiveness date provided they are endorsed by the EU. 2.2 Summary of the most important accounting principles Important management decisions and assessments Presentation of consolidated financial reports in compliance with the International Financial Reporting Standards presumes that the management gives assessments and makes decisions that affect the principles of reflecting assets and liabilities and the value on the balance sheet date, of presenting conditional assets and liabilities based on the probability of their realization, as well as revenue and expenses of the accounting period. Although management reviews its decisions and assessments in a consistent manner, and this is based on prior experience and the best available knowledge regarding probable future events, the actual results may differ from assessments. The most important management decisions that influence the information recognized in financial reports are related to the following fields of assessment: Real estate classification In classifying real estate objects into stock, investment properties or tangible assets, the management post-acquisition intentions of successive use are based on both initial registration and later reclassification. Implementation of plans may require additional decisions independent of the Group (changing the intended purpose of land, approving a detailed plan, issuing building permits, etc.), reducing the accuracy of asset classification. The purpose of acquisition of real estate objects recognized as stock is development and transfer of human environment, separate residential buildings or residential lots; real estate objects that have been acquired in the course of usual business activity for resale are recognized as stock. 20

21 The purpose of acquiring investment properties is to receive income from operating lease payments of the real estate object or the growth of its market value; investment properties are also objects that are kept for a longer period and have several possible purposes of use. The real estate objects that the Group is still developing into a business environment for operating lease or where extensive reconstruction of the acquired business building takes place shall be recognized as investment properties. Uncertainty of assessment The management gives their assessments based on experience and the facts that have become evident at the date of preparation of the annual accounts at the latest. Therefore there is a risk with the assets and liabilities presented at the balance sheet date, and the related revenue and expenses, that the assessment given needs specification in the future. The fields, in which there is a higher than usual risk of a need for correction due to uncertainty of assessments, are described below. Investment properties: determining fair value Investment properties are assessed at their fair value as at each balance sheet date. In addition to the management assessment, an expert opinion of independent certified appraiser is used when necessary in determining the fair value of an investment property, i.e., for more important investments, parallel valuations are taken from independent real estate experts, if necessary. In determining the fair value, the method of discounted cash-flows is used. Additional information on the preconditions and sensitivity used in assessments can be found in Note 12. Receivables Management periodically analyses the probability of receiving receivables and makes allowances where necessary. Additional information on the risks that may have an impact on the residual value of receivables is stated in the Credit Risk subsection of Note 18. Consolidation The consolidated annual accounts presents the financial indicators of EfTEN Kinnisvarafond AS, its subsidiaries and the joint ventures, consolidated line-by-line. The subsidiaries and the joint ventures shall be consolidated from the date when, correspondingly, the dominant influence or joint control has been transferred to the Group, and consolidation shall be ended from the date from which the Group no longer has the dominant influence or joint control. A subsidiary is a company over which the parent company has control. A subsidiary is considered to be controlled by a parent company if the latter owns, either directly or indirectly, more than 50% of the subsidiary s voting shares or interests, or is in some other way able to control the activity or financial policy of the subsidiary. A joint venture is a company over which two or more parties (including the parent company) have contractual joint control. Joint ventures are consolidated by proportional consolidation, as a result of which the Group joins its part of all assets, liabilities, revenues and expenses of the joint venture with the similar entries to the consolidated annual accounts. The subsidiaries and joint ventures use the same accounting policies in preparing their accounts as the parent company. All transactions, receivables and liabilities taking place inside the Group, as well as unrealized profits and losses from transactions between Group companies, have been fully eliminated in the annual accounts. An unrealized loss shall not be eliminated if it is substantively a decrease in the value of assets. New subsidiaries and joint ventures (business combinations) shall be recognized in the consolidated annual accounts on the purchase method. 21

22 The acquisition cost of business combinations recognized in the purchase method shall be divided between the fair values of assets, liabilities and conditional liabilities as at the date of acquisition. The part of the acquisition cost that exceeds the fair value of acquired assets, liabilities and conditional liabilities, shall be recognized as goodwill. If the fair value exceeds acquisition costs, the difference shall be immediately recognized as period revenue in full extent (under general administration expenses in the income statement). In the event of a business combination as a result of which a company leasing out commercial properties is acquired, the difference between the fair value and acquisition cost shall be recognized as a change in the fair value of investment properties under other business revenues or expenses. Investment into a subsidiary or a joint venture in the unconsolidated balance sheet of the parent company In the unconsolidated balance sheet of a parent company (presented in Note 23) the investments into the subsidiaries and joint ventures have been recognized in fair value similarly to financial assets that are recognized in fair value. The dividends paid by subsidiaries and joint ventures shall be recognized at the moment when the parent company obtains the right to these dividends as a mediation of investment and a receivable from a subsidiary or a joint venture. Recognizing revenue Revenue shall be recognized in the fair value of proceeds received or to be received from transactions. Revenue shall only be recognized in the probable and reliably measured extent of the fiscal advantages to be received. Income from rent of real estate investments shall be recognized linearly throughout the rental period as revenue. Income from intermediation of services (fees for public services of subtenants, sublease, and other intermediated services) shall be netted with the expense on services purchased. Finance income Interest revenues shall be recognized on an accrual basis, using the method of effective interest rate. Dividend revenues shall be registered at the moment when a right for the receivable arises. Cash and cash equivalents Cash and cash equivalents are cash and short-term (up to 3 months from the moment of acquisition) high-liquidity investments that can be turned into a known amount of cash for up to three months from the actual transaction date and which have an insignificant risk of marked change in market value. Such assets are cash, cash deposited on demand and with a deadline of up to three months, as well as money market fund shares. Financial assets All financial assets are initially registered in their acquisition cost, which is the fair value of the amount paid for the assets. Acquisition cost includes all direct expenses related to acquisition of financial assets, including the fees for intermediaries and counsellors, non-redeemable charges related to the transaction, and other similar expenses. An exception is financial assets recognized in changes in fair value through the income statement, additional expenses related to the acquisition of which are recognized as expense in the income statement. 22

23 Acquisition and sales of financial assets taking place under normal market conditions shall be recognized at the date of transaction. The date of transaction is the day of creation of a purchase or sale liability (for example, the date of entering into a contract). The purchase or sale is considered to have taken place under normal market conditions when the seller has transferred the financial assets to the buyer by the deadline customary in this market or stipulated in legislation. After initial registering, financial assets shall be divided into groups (see below). At the end of each financial year it is verified whether the financial assets are recognized under the right group, and necessary improvements are made if necessary. The financial assets that the international financial reporting standards do not allow to be reclassified shall not be reclassified. The following principles are used by groups in measuring financial assets: financial assets recognized in changes in fair value through income statement fair value; held-to-maturity investments amortized acquisition cost; receivables amortized acquisition cost; available-for-sale financial assets fair value or acquisition cost in case of equity instruments, the fair value of which cannot be reliably assessed. Financial assets in fair value Financial assets in fair value shall be reassessed as at each balance sheet date, whereat the possible transaction costs related to realization of assets shall not be deducted from the fair value. In case of securities admitted to official listing on a stock exchange, the fair value is based on the closing prices and the official exchange rates of Eesti Pank. In case of securities not admitted to official listing on a stock exchange, fair value is found based on the available data and using a comparison with the fair value of other, similar instruments as at the balance sheet date, and/or an analysis of discounted cash-flows. Profits and losses due to changes in fair value shall be generally recognized in the income statements under finance income, and financial and investment business expense. An exception is financial assets to be sold, the profit or loss of the change of its fair value shall be recognized directly in the entry of revaluation reserve under equity. The revaluation reserve balance shall be entered into the income statement after the assets have been realized or the decrease in value ascertained. The amount to be reclassified from the income statement from equity in case of a drop in value is the difference between the acquisition cost of the financial assets (reduced by the capital repayments and depreciation) and the fair value from which the loss due to depreciation of assets that have already been recognized in the income statement has been deducted. Profit and loss from realization of financial assets recognized in their fair value, as well as interests and dividends from acquisition of assets shall be recognized in the income statement under financial and investment revenue and financial and investment expense. Receivables from other parties and held-to-maturity financial investments Receivables, which are not made for the purpose of resale, and held-to-maturity financial assets, shall be recognized after acquisition in their amortized acquisition cost that has been calculated through effective interest rate. The amortized acquisition cost is determined for the entire useful life of the financial assets, taking into consideration the allowances and premiums on acquisition, as well as expenses directly related to the transaction. In case of an objective circumstance that refers to the falling of the recoverable value of the assets below the book value, financial assets recognized on the method of amortized acquisition cost will be allowanced by the difference between the book value and the recoverable value. Recoverable value is the present value of cash-flows to be received from financial assets in the future, being discounted with the effective rate fixed in primary recognition. Allowance of financial assets related to business activity shall be recognized in the income statement as a business expense under general management expense, and allowance of financial assets related to investment business shall be presented as financial expense in the income statement. For important financial assets, reduction of value of each object shall be assessed separately. If 180 days or more has passed 23

24 from the date of receipt of the receivable, the amount from the receivable is considered likely not to be received and written off 100%. If a decrease in the value of assets becomes evident more quickly, the receivables are allowanced sooner. If an allowanced receivable is still received or some other event takes place that cancels the allowance, cancellation of allowance shall be presented in the income statement as a reduction of the expense entry in which the allowance was initially recognized. The interest revenues from receivables and held-to-maturity financial investments shall be recognized in the income statement under finance income and expense. Financial assets recognized in their acquisition cost Financial assets recognized in acquisition cost shall be allowanced to the recoverable value if the latter is lower than the book value of the financial asset. Value covered by financial assets recognized in acquisition cost is the future cash-flow expected from the financial assets, allowanced with the average profitability rate at a market of similar financial assets. Allowance of financial assets is recognized as a financial expense in the income statement and such allowance will not be cancelled later. Recognition of financial assets will be discontinued when company loses the right for cash-flows from these financial assets and also upon creation of a liability to transfer these cash-flows in full extent and without significant delay to third parties, to whom most of the risks and benefits related to the financial assets shall be transferred. Transactions fixed in foreign currency All currencies besides the EUR (currency of the parent company) shall be deemed a foreign currency. Reflection of transactions fixed in foreign currency is based on the official exchange rates of the European Central Bank at the date of the transaction. Monetary assets (cash, cash equivalents, and receivables) and monetary liabilities (loans received and payables) fixed in foreign currency shall be revaluated in EUR as at the date of the balance sheet, based on the rates of the European Central Bank at the balance date. The exchange gains and losses as a result of revaluation shall be presented in the income statement of the reporting period as revenues and expenses from financing and investment activities. Nonmonetary assets and liabilities fixed in foreign currency and measured in their acquisition cost shall be registered based on the European Central Bank exchange rate at the date of the transaction. Nonmonetary assets and liabilities fixed in foreign currency and measured in their fair value shall be revaluated to their base currency, based on the European Central Bank exchange rates at the date of setting the fair value. If the functional currency of the subsidiaries and joint venture differs from the one of the parent company (for instance, Latvian LAT for companies operating in Latvia), the following exchange rates are used for revaluating the reports of the subsidiaries and joint ventures for consolidation: the balance sheet rate for revaluation of entries on assets and liabilities of all foreign subsidiaries and joint ventures(including the goodwill emerging from acquisition of subsidiaries and joint ventures, and corrections of fair value); weighted average rate of the period in revaluation of the revenue, expense, other equity changes, and cash flows of subsidiaries and joint ventures. The difference between revaluations, that is the balance sheet date and the weighted average rates has been reflected in the equity entry other reserves. In case of transfer of subsidiaries and joint ventures located abroad, the amounts under an equity entry other reserves shall be reflected as a profit or loss of the reporting year. 24

25 Derivative instruments The risk policy of the Group regulates that company may use interest rate swap from derivative instruments to manage the risks related to change in interest rates. Such derivative instruments shall be registered in their fair value at the date of entering into a contract and later reassessed in accordance with the change in the fair value of the instruments by the balance date. A derivative instrument with a positive fair value shall be recognized as assets and the opposite instruments and liabilities. In determining the fair value of interest rate swap, the balance date of bank quotations is taken as a basis. In making the transaction, the Group shall fix the relationship between the hedge accounting instruments and the objects to be managed, as well as the objective and strategy of its hedge accounting to perform several hedge accounting transactions. The Group shall also fix its valuation on both entering into the hedge accounting instrument and also continuously on whether the derivative instruments used in risk management transactions are efficient in managing the fair values of the managed objects or the changes in cash-flows. Cash-flow hedge accounting Equity recognizes the effective part of the changes in fair value of derivative instruments determined as cash-flow hedge accounting instruments and those qualified as such. Profit or loss related to inefficient part is immediately recognized under the income statement entry Interest revenues or Interest expense. The amounts accumulated in equity shall be divided in the income statement on the periods in which the object to be managed affects profit or loss. Profit or loss that is related to the effective part of an instrument that manages a loan with a variable rate shall be recognized in the income statement under Interest expense. If the hedge accounting instrument expires or is sold, or if the hedge accounting instrument no longer corresponds to the criteria of hedge accounting instrument assessment, the cumulative profit or loss recognized in equity at that time shall remain in equity and will be recognized when the future transaction has been finally recognized in the income statement. If the future transaction is no longer expected, the cumulated profit or loss recognized in equity is immediately recognized under the income statement entry Interest revenues or Interest expense. Investment properties Investment properties are lands and buildings that are kept for the purpose of earning income from rent or an increase in the market value, not used in economic activity of the company. Objects that are held for a long time and have several possible purposes of use are also considered real estate objects. An investment property is initially registered on a balance sheet in its acquisition cost that includes the transaction fees directly relating to acquisition: notary fees, state fees, remunerations paid to counsellors and other expense without which the purchase transaction may probably not have been made. Henceforth, investment property shall be recognized on each balance sheet date in its fair value which is based on the actual market conditions on that balance sheet date. In determining the fair value of an investment property, both internal valuators (according to the EfTEN Kinnisvarafond investment property valuation regulation, the fair value of investment properties is assessed by the general meeting) and the opinion of experts is used. In determining the fair value, the method of discounted cash-flows is used. In order to find the value of discounted cash-flows, an appraiser must forecast the future rental revenues from the real estate object (including the rent on 1 m2 and the occupancy rate of the space) and the operating costs. Depending on how easy and possible it is for tenants to cancel the rental agreements, an appraiser selects either existing cash-flows or the average market cash flows for analysing. Also, to find the present value of net cash-flow, a suitable discount rate must be selected, reflecting the market trends of the present value of cash, as well as specific risks related to the assets. The basis of a discount rate selection is the average capital structure of the market, not asset structure. The method of discounted cash-flows is used in determining the value of real estate objects that have a stable rental flow. 25

26 Profits or losses due to changes in these values shall be recognized in the income statement under other business profits or other business loss. An investment property is no longer recognized in the balance sheet after the object is transferred or removed from use, if the object presumably brings no future fiscal advantages. Profit and loss from ending recognition of an investment property shall be recognized at the income statement of the closing period under other business profit or other business loss. If the purposes of the use of a real estate object changes, assets are reclassified in balance sheet. From the date of change, the accounting policies of the group to which the object has been transferred shall apply to the object. If an object that was previously recognized as an investment property is reclassified into tangible assets, the new derived acquisition cost of the object is its fair value as at the date of reclassification. If a real estate object is reclassified from tangible assets into an investment property, the positive difference between the fair and book value shall be presented as at the date of reclassification in the entry of retained earnings; negative difference shall be recognized in the income statement under amortization costs of fixed assets. An exception is buildings under construction, on reclassification of which into investment properties, both positive and negative differences shall be presented in the income statement in the entry of other business profit or other business loss. If a real estate object recognized as stock is reclassified into an investment property, both positive and negative difference between the fair value and book value shall be recognized in the income statement as at the date of reclassification under other business profit or other business loss. Financial liabilities All financial liabilities (debts to suppliers, loans taken, accruals, issued securities and other short- and long-term debt liabilities) shall initially be registered in their acquisition cost that also includes all expense directly related to acquisition. Further recognition is done on the method of amortized acquisition cost (except the financial liabilities obtained for resale, which are recognized in their fair value). Amortized acquisition cost of short-term financial liabilities is generally equal to their nominal value, wherefore short-term financial liabilities are recognized on balance sheet in the amount to be paid. Long-term financial liabilities shall be initially registered in the fair value of the remuneration received (from which transaction costs have been deducted) to calculate the amortized acquisition cost; interest shall be calculated on transactions on the following periods by using the method of internal interest rate. Interest costs accompanying financial liabilities shall be recognized in the income statement on an accrual basis, in the entries financial and investment revenue and financial and revenue expense. Interests related to financing development of assets (real estate projects recognized as stock, investment properties, and property, plant and equipment) from the beginning of development period until transfer of the completed assets has been capitalized as an exception into the asset acquisition cost. A financial liability is considered short-term if it must be paid in 12 months since the balance date or if the company has no unconditional right to defer payment of liabilities for more than 12 months after the balance date. Loan liabilities that must be paid in 12 months after the balance sheet date but are refinanced into long-term liabilities after the balance sheet date, but before approval of the annual report shall be considered short-term. Loan liabilities that the lender may remove on the balance sheet date due to breach of loan contract are also recognized as short-term. Recognition of a financial liability shall be ended upon fulfilling, cancelling or expiring of the contractual liabilities. Provisions and conditional liabilities Provisions shall be recognized on a balance sheet only when the company had a legal or factual liability resulting from the events taken place by the balance sheet date, performance of which would probably require assignation of assets in a reliably determined amount in the future. 26

27 Promises, guarantees and other commitments that may become liabilities in the future on certain conditions (that have not occurred so far) shall be disclosed in notes to annual accounts as conditional liabilities. Conditional liabilities are also liabilities due to events that have occurred by the balance sheet date, that will not realize according to the management assessment, and/or that cannot be reliably measured. Leases Finance lease is rental transactions at which all the important risks and benefits related to right of ownership of the assets shall carry over to the tenant. All other rental transactions shall be treated as operating lease. Assets that have been acquired under the conditions of finance lease shall be recognized on the balance sheet from entering into force of the rental contract in its fair value or at the present value of the minimum amount of rental payments, if the latter is lower. As depreciation period of property, plant and equipment acquired under the conditions of finance lease, the shorter of the two following is taken: foreseeable useful life of the assets or an agreed rental period. Assets sold under the conditions of finance lease shall be presented on a balance sheet as a receivable in the amount of the net investment made to finance lease. Rental payments of different periods are divided into financial expense, revenue or receivable, and rental liability or receivable, using the similar interest rate during the rental period. As for operating lease, the assets to be rented are recognized on the balance sheet of the commercial lessor. Payments of operating lease received and paid are divided into periods linearly as a profit or loss of a rental period. Mandatory capital reserve According to the Commercial Code, mandatory capital reserve must form at least 10% of the share capital of a company. Based on that, the parent company shall allocate at least 5% of the net profit to the mandatory capital reserve annually at division of profit. Provisions shall be made until the reserve achieves its required volume. Mandatory capital reserve may not be paid out as dividends, but it may be used for covering accumulated losses if there is insufficient amount of free equity to cover the losses. Mandatory capital reserve may also be used for increasing share capital through issuing shares. Income tax Parent company and subsidiaries registered in Estonia According to the Income Tax Act, profit distribution (dividends) paid out is taxed in Estonia instead of the company s profit of an accounting year. The tax rate of (net) dividends is 21/79. Income tax on payment of dividends shall be recognized in the income statement as an expense upon announcement of dividends (creation of payment liability). Subsidiaries in Latvia The net profit of companies is taxed with a 15% income tax in Latvia. Taxable income shall be calculated from the company s profit before income tax, corrected in income tax returns by temporary or permanent income or expense attributes under the requirements of the local income tax legislation. In case of foreign subsidiaries, the postponed income tax assets or liabilities shall be found on all the temporary differences in the taxation values and accounting values at the balance sheet date. Postponed income tax assets shall be presented on a balance sheet only when in a foreseeable future it is likely that an income tax liability of the similar size with the postponed income tax will arise and could be used for settlement of accounts. 27

28 3 Subsidiaries and joint ventures The company Country of location Investment property Group interest, % Parent company EfTEN Kinnisvarafond AS Estonia Subsidiaries EfTEN SPV1 OÜ Estonia Ülikooli 6a office building, Tartu EfTEN SPV2 OÜ Estonia Lauteri 5 and Narva mnt 59 office buildings, Tallinn EfTEN SPV3 OÜ Estonia UKU Centre, Viljandi EfTEN SPV4 OÜ Estonia Joint building of Rakvere police and rescue, Rakvere EfTEN SPV5 OÜ Estonia Pärnu mnt 105 office building, Tallinn EfTEN SPV6 OÜ Estonia Pärnu mnt 102 office building, Tallinn EfTEN SPV7 OÜ Estonia Mustika Centre, Tallinn EfTEN SPV8 OÜ Estonia Mustika Centre (Prisma), Tallinn EfTEN SPV9 OÜ Estonia Kadaka tee 63 office building, Tallinn EfTEN SPV10 OÜ Estonia Laki 24 office building, Tallinn EfTEN SPV12 OÜ Estonia Piirimäe 10/10a; Kungla 2; Kuuli 10; Tammsaare tee Rautakesko; Silikaadi 6/ EfTEN SPV14 OÜ Estonia Rautakesko store building, Võru EfTEN SPV15 OÜ Estonia Tallinna Külmhoone EfTEN SPV16 OÜ Estonia Prisma store building, Narva EfTEN Stabu 10 SIA Latvia Stabu 10 office building, Riga EfTEN Jelgava SIA Latvia Jelgava shopping centre, Jelgava Joint ventures EfTEN SPV11 OÜ Estonia Palace Hotel, Tallinn 50 - Lepa Keskus OÜ Estonia Lepa Centre in Pärnu All subsidiaries and joint ventures operate in acquisition and leasing of investment properties. In December 2012, EfTEN Kinnisvarafond AS established two subsidiaries EfTEN SPV9 OÜ and EfTEN SPV10 OÜ with a purpose of acquiring new investment properties. The share capital of the subsidiaries was a total of EUR 5,000. In the beginning of 2013, EfTEN Kinnisvarafond increased the share capital of the abovementioned companies by paying a total of EUR 3,204 thousand to the equities of the subsidiaries. Acquisition of the new investment properties took place in February 2013 (see Note 12). In the beginning of February 2013, EfTEN Kinnisvarafond AS, together with Esraven AS, founded EfTEN SPV11 OÜ as a joint venture l with the purpose of acquiring the registered immovable of Palace Hotel in Tallinn. The interest of EfTEN Kinnisvarafond AS in this company is 50%. In April 2013, the shareholders increased the equity of EfTEN SPV11 OÜ by a total of EUR 4,500 thousand and the joint venture acquired 100% of the shares of Balotel AS (operating company of Palace Hotel) with the received funds, which, in turn, owned 100% of a subsidiary Finest Palace OÜ (owner of the registered immovable of Palace Hotel). On , Balotel AS, Finest Palace OÜ and EfTEN SPV11 OÜ merged and EfTEN SPV11 OÜ sold the operating activity of the hotel to a company that is not related to the Group. The sales of the operating activity had no material impact on the financial position or results of the Group. 28

29 The Group closed Palace Hotel for development in September 2013 and the doors to a new fully renovated building will be opened to guests in June As at , the development of the hotel is ongoing. The fair value of assets and liabilities related to acquisition of Balotel AS and its subsidiaries has been presented in the following table: Balotel AS 100% value 50% Cash Receivables and prepayments Investment properties (Annex 12) 4,150 2,075 Property, plant and equipment (Note 13) Owner loans Other liabilities Fair value of net assets 4,008 2,004 Acquisition cost 4,008 2,004 Goodwill 0 0 As at , the Group has an outstanding amount of EUR 33 thousand for acquisition of Balotel AS. In addition to the acquisition cost of Balotel AS in the amount of EUR 2,004 thousand, the Group also paid EUR 167 thousand for taking over the owner loans of Balotel AS under the transaction. Brokerage fees in the amount of EUR 46.5 thousand were added to the cost of the transaction. In February 2013, EfTEN Kinnisvarafond AS acquired 100% of the EfTEN SPV16 OÜ (former business name Shenon Kinnisvara OÜ) shares. The subsidiary owns Prisma store building in Narva at Kangelaste pr 29. The fair value of the assets and liabilities related to acquisition of EfTEN SPV16 OÜ has been presented in the following table: EfTEN SPV16 OÜ Fair value Cash 165 Receivables and prepayments 2 Investment properties (Annex 12) 14,850 Bank loans -6,063 Owner loans -2,604 Other liabilities -405 Fair value of net assets 5,945 Acquisition cost 5,945 Goodwill 0 29

30 In addition to payment of the acquisition cost for EfTEN SPV16 OÜ in the amount of EUR 5,945 thousand, EfTEN Kinnisvarafond AS also took over owner loans upon acquisition, paying EUR 2,604 thousand for them to the seller. The Group also ended the interest swap agreement of the subsidiary upon its acquisition, the fair value of which at the date of acquisition was negative in the amount of EUR 371 thousand. In March 2013, EfTEN Kinnisvarafond AS acquired 100% of the shares of a Latvian company EfTEN Stabu 10 SIA (former business name Geep SIA ) by paying EUR 3 thousand for the interest. After acquisition of the interest, EfTEN bought the Stabu 10 SIA registered immovable in Riga, at Stabu 10. As at , this registered immovable is earning rental revenue. In April 2013, EfTEN Kinnisvarafond AS also bought another Latvian company EfTEN Jelgava SIA (former business name Auras Nami SIA) by paying EUR 300 thousand for a 100% interest. At the moment of acquisition, the acquisition cost of the interest was divided between company s assets and liabilities as follows: EfTEN Jelgava SIA Fair value Cash 0 Receivables and prepayments 1 Investment properties (Annex 12) 924 Owner loans -624 Other liabilities -1 Fair value of net assets 300 Acquisition cost 300 Goodwill 0 In addition to payment of the acquisition cost, EfTEN Kinnisvarafond AS also took over owner loans of EfTEN Jelgava SIA upon acquisition, paying EUR 620 thousand for them. In June 2013, EfTEN Kinnisvarafond AS established the 100%-owned subsidiary EfTEN SPV12 OÜ and paid EUR 10,603 thousand to the share capital of the subsidiary. The subsidiary was acquired for obtaining five investment properties (EPI portfolio) in the beginning of July In August and September 2013, EfTEN Kinnisvarafond AS established two 100% subsidiaries EfTEN SPV14 OÜ and EfTEN SPV15 OÜ with the purpose of restructuring the Group s assets. Two first investments of EfTEN Kinnisvarafond were sold to these companies Tallinna Külmhoone at Betooni 4, and the store building of Rautakesko in Võru. The in-group transactions were made at market prices. In June 2012, EfTEN Kinnisvarafond AS established two subsidiaries EfTEN SPV7 OÜ and EfTEN SPV8 OÜ with a purpose of acquiring the Mustika Centre in Tallinn as an investment property. The total share capital of the subsidiaries paid was EUR 8,753 thousand.the joint ventures shares in the Group s assets, liabilities, revenues and expenses have been presented in the following table: Current assets 344 Revenue 196 Non-current assets 3,950 Expenses, incl Short-term liabilities -237 change in the fair value of investment properties -177 Long-term liabilities -1,252 Net assets 2,805 Net loss -187 The shares of none of the subsidiaries or the joint venture are publicly traded. 30

31 4 Revenue Areas of operation Rental revenue from office space 3,485 2,478 Rental revenue from state institutions Rental revenue from sales space 4,221 1,425 Rental revenue from warehouse space 1, Rental revenue from service space Rental revenue from parking lots Other revenue Total revenue by areas of operation 10,225 5,394 EUR 183 thousand of the sales revenue of the Group has been earned in Latvia and the rest of the sales revenue has been received from Estonia. 5 Property operating expenses Repairs and maintenance of rental space Insurance of assets Land tax Other management cost Salary expense, incl. taxes Allowance of accounts receivable Total property operating expenses Marketing costs Brokerages of rental premises Advertising, advertising events Total marketing costs

32 7 Administrative expenses Management service Office costs Salary expense, incl. taxes Consultation costs Change in the success fee liability (Note 17) -1, Other general management costs -3 0 Amortization costs (Note 13) -5 0 Total administrative expenses -2, Other incomes and other expenses Other income Profit from change in fair value of investment properties (Note 12) 5,306 1,958 Profit from sales of investment properties (Note 12) Fines for delay and penalties 1 8 Other revenues 1 2 Other income, total 5,588 1,969 Other expenses Loss from change in fair value of investment properties (Note 12) Profit from sale of property, plant and equipment (Note 13) -1 0 Loss from the impairment of property, plant and equipment (Note 13) Other expenses -1 0 Other expenses, total Financial expenses Interest expenses, including -1,688-1,103 Interest expenses on loans -1, Interest expenses on derivative instruments (-)/reduction of expenses (+) Loss from changes in exchange rate -5 0 Total financial expenses -1,693-1,103 32

33 10 Cash and cash equivalents Cash and transferable deposits 19,314 1,554 Fixed-term deposits 0 11,133 Total cash and cash equivalents 19,314 12, Receivables and accrued income Accounts receivables Bad debt Accounts receivables, total Other short-term receivables 15 1 Total other short-term receivables 15 1 Interests 7 0 Prepayments and reclamations of VAT Other accrued income Total accrued income Total receivables Long-term receivables of the Group as at in the amount of EUR 326 thousand consist of the non-eliminated part of the loan receivable given to the joint ventures (50% of the original receivables). This loan has an interest of 4% per annum and has been entered into with a repayment deadline in

34 12 Investment properties As at , the Group has invested in the following investment properties: Name Location Area (m²) Useful area (m²) Time of acquisition Year of construction Acquisition cost Market value Share of the market value of fund's assets Tallinna Külmhoone Betooni 4, Tallinn 18,773 6, Sept ,237 7,170 4% Võru Rautakesko Kreutzwaldi 89, Võru 10,110 3, Sept ,270 3,333 2% Lepa Centre1 Karja 4, Pärnu 4,118 4, Dec ,995 2,523 1% UKU Centre Tallinna 41, Viljandi 6,540 5, Aug ,390 7,246 4% Rakvere Police Building Kreutzwaldi 5a, Rakvere 5,775 5, Nov ,940 6,097 4% Lauteri 5 Lauteri 5, Tallinn 3,941 3, Dec ,244 3,715 2% Ülikooli 6 Ülikooli 6, Tartu 697 2, May 11 2,329 2,450 1% Pärnu mnt 102 Pärnu mnt 102, Tallinn 4,053 9, Dec ,280 12,820 8% Pärnu mnt 105 Pärnu mnt 105, Tallinn 3,075 5, Dec ,270 6,421 4% Mustika Centre Tammsaare tee ,546 27, ; 2013 July 12 30,381 31,389 19% Palace Hotel1 Vabaduse väljak 3/ Pärnu mnt 14 1,119 4, ; Apr ,361 5,361 2% Jelgava shopping centre Riia mnt 48, Jelgava 16,785 4, March 13 2,142 2,142 1% Narva Prisma Kangelaste pr 29, Narva 30,607 13, Feb ,850 15,361 9% Laki 24 Laki 24, Tallinn 7,672 1, Jan ,659 1,541 1% Kadaka tee 63 Kadaka tee 63, Tallinn 20,464 7, Jan ,167 7,429 4% Stabu 10 office building Stabu 10, Riga 774 3, March 13 3,069 3,097 2% Piirimäe 10/10a Piirimäe 10/10a, Saku 10,228 5, July 13 2,857 2,875 2% Kungla 2 Kungla 2, Saue 11,853 4, July 13 2,757 2,915 2% Kuuli 10/Punane 73 Kuuli 10/Punane 73, Tallinn 24,557 15, July 13 9,171 9,962 6% Tammsaare tee Rautakesko Tammsaare tee 49, Tallinn 31,100 9, July 13 12,930 13,587 8% Silikaadi 6/8 Silikaadi 6/8, Tartu 11,050 6, July 13 2,857 3,295 2% Total 148, , ,728 88% 1 Lepa Centre and the Palace Hotel belong to the Group s joint ventures with a 50% interest and are proportionally consolidated. The table shows 100% of the joint ventures indicators. 34

35 Investment properties in the development stage Completed investment properties Prepayments for investment properties Total investment properties Balance as at ,283 45, ,880 Acquisitions 4,748 21, ,714 Capitalized interest expense Reclassifications -6,046 6, Reclassifications from property, plant and equipment Profit /loss from change in fair value (Note 9) 0 1, ,935 Balance as at , ,545 Acquisitions 10,414 42, ,915 Acquisitions from business combinations (Note 3) 1 3,046 14, ,896 Sales ,479 Reclassifications Reclassifications from property, plant and equipment (Note 13) Profit /loss from change in fair value (Note 8) 0 4, ,904 Balance as at , , ,786 1 Acquisitions from business combinations in 2013 contain, among others, brokerage fees related to acquisition of joint ventures in the amount of EUR 47 thousand. 2 In 2013, the Group sold two investment properties in Tallinn at Lõkke 4 and Narva mnt 59. The total selling price of the registered immovables was EUR 4,759 thousand. Among others, the following investment properties related expenses, revenues and balances are indicated in the Group s income statement and balance sheet: As at December 31 or per annum Rental revenue on investment properties 10,079 5,310 Direct expense form management of investment properties (Note 5) Capitalized improvements to the pre-existing investment properties Unpaid amounts from acquisition of investment properties (without VAT) (Note 16) Book value of investment properties set as securities to loan liabilities 146,800 75,545 All investment properties of EfTEN Kinnisvarafond AS that produce revenue from rent have been pledged as securities of long-term bank loans. Some of the rental agreements entered into between EfTEN Kinnisvarafond AS and the tenants correspond to the terms and conditions of non-interruptible operating lease contracts. The profit from such contracts divides as follows: up to 1 year 12,177 6, years 42,383 18,217 more than 5 years 39,684 12,150 Total 94,244 36,386 35

36 Assumptions and bases for calculating change in the fair value of investment properties The Group assesses its investment properties in their fair value, using the real estate assessment rules set by the management company. In valuing immovable properties, the valuation standards EVS 875-1:2005, EVS 875-2:2005, EVS 875-3:2005, EVS 875-4:2005, EVS 875-5:2005, EVS 875-6:2006, EVS 875-7:2006, EVS 875-8:2007 and EVS 875-9:2007 valid in Estonia are being based on. The investment properties of the Group are assessed by the general meeting of the management company. The fair value of all investment properties recognized in the Group reports as at has been calculated using the discounted cash flow method. The following presumptions have been used in finding the fair value: Increase in annual rental revenue 1,6%-2% 1,5%-2,5% Increase in annual expenses 1,5%-2,5% 1,5%-2,5% WACC 10%-11% 10,5% Capitalization rate upon leaving the project 8,0%-9,5% 8,5%-9,5% Sensitivity analysis of fair value The table below illustrates the sensitivity of the fair value of investment properties to the most important preconditions of evaluations: Increase in exit yield by 50 basis points -5,104-1,825 Decrease in indexation of portfolio rental revenue by 250 basis points -3,765-1,487 36

37 13 Property, plant and equipment Machinery and equipment Other property, plant and equipment Total Acquisition in Depreciation in 2012 accounting year (Note 8) Residual value Acquisition cost Accumulated depreciation Acquisitions in Additions from business combinations (Note 3) Impairment from decrease in value (Note 8) Reclassification to investment properties (Note 12) Sales and liquidation Depreciation in 2013 accounting year (Note7) Residual value Acquisition cost Accumulated depreciation

38 14 Loan liabilities As at , the Group had the following loan liabilities: Lender Loan balance as of Date of taking the loan Settlement term Security Interest rate Basis for the floating interest share Actual Share of the market value of fund's assets SEB 4, mortgage 1.5% 1M EURIBOR 1.68% 4, % DnB Nord 2, mortgage 1.6% 6M EURIBOR 2.12% 2, % SEB mortgage 2.0% 1M EURIBOR 2.23% 1, % SEB 2, mortgage 2.0% 1M EURIBOR 2.18% 2, % SEB 4, mortgage 2.2% 1M EURIBOR 2.43% 4,529 2,6% Swedbank 4, mortgage 2.1% 1M EURIBOR 2.33% 4, % Swedbank 4, mortgage 2.0% 1M EURIBOR 2.17% 4, % Swedbank 8, mortgage 2.0% 1M EURIBOR 2.17% 8, % SEB 15, mortgage 1.9% 1M EURIBOR 2.08% 17, % SEB1 1, mortgage 2.3% 1M EURIBOR 2.53% 1, % SEB 4, mortgage 2.1% 1M EURIBOR 2.33% 4, % SEB mortgage 2.1% 1M EURIBOR 2.33% % Pohjola Bank 9, mortgage 2.4% 1M EURIBOR 2.50% 9, % SEB 1, mortgage 2.9% 1M EURIBOR 3.03% 1, % Danske 19, mortgage 1.6% 1M EURIBOR 1.83% 20, % Owner loan of joint venture % % Total 83,297 88, % 1 The loan has been taken by a joint venture that is proportionally consolidated. The table shows 100% of the joint venture indicators. Short-term loan liabilities Repayments of long-term loan liabilities in the next period, incl. 3,764 3,819 Bank loans 3,764 3,819 Total short-term loan liabilities 3,764 3,819 Long-term loan liabilities Total long-term loan liabilities 82,379 42,582 incl. the short-term part of loan liabilities 3,764 3,819 incl. the long-term part of loan liabilities 78,616 38,764 Bank loans 78,291 38,764 Owner loans

39 The bank loans of EfTEN Kinnisvarafond AS are nominated in EUR and entered into on the basis of floating rate. The interest margins of bank loans remain within the range of 1.5% to 2.9%. The weighted average interest rate of the bank loans of EfTEN Kinnisvarafond AS as at was 2.1% ( : 2.8%). The final terms of the loan contracts remain in the period of The interest rate of long-term owner loans is 4% per annum and their repayment deadline is in The bank loans divide as follows based on the payment deadlines: Less than 1 year 3,764 3, years 78,616 38,764 Total bank loan repayments 82,379 42, Derivative instruments As at , the Group had interest-rate swaps for fixing the interest rate of long-term loans to the nominal sum of EUR 10,846 thousand. As at , the Group had no derivative instruments. The terms and deadlines of all interest-rate swaps observed the repayment schedule of the loan to be managed and were treated in accounting as a cash-flow hedge accounting instrument. As at , the Group had four transactions with derivative instruments for management of interest rate risk. The final deadlines of three transactions with derivative instruments were in 2013, whereat the base interest for two transactions is one month EURIBOR and for the third, 6 month EURIBOR. The Group terminated a transaction with derivative instruments in relation to selling of the related underlying assets in the autumn of 2013 and paid EUR 16 thousand to the bank upon termination of the transaction. The floating interest rates of the Group were fixed at the levels of 1.31% to 4.999% based on interest swap contracts. All payments in relation to derivative instruments were made in EUR. 39

40 16 Short-term payables and prepayments Trade payables Other payables 48 0 Other payables total 48 0 Value added tax Individual income tax 1 1 Social tax 2 2 Total taxes payable Interest payable Payables to employees 5 3 Payables from acquisition of associated companies 33 0 Deposits received from tenants 39 0 Other accruals 8 0 Total accruals Prepayments received from tenants Other prepaid revenues 5 8 Total prepayments 4 0 Total payables and prepayments 9 8 Võlad ja ettemaksed kokku Trade payables as at include, among others, a total of EUR 421 thousand from the unpaid amounts on investment properties ( : EUR 12 thousand). As at , the interest debts included debts to related parties in the amount of EUR 5 thousand ( : EUR 23 thousand). See additional information on the related parties from Note

41 17 Success fee liability EfTEN Kinnisvarafond AS and EfTEN Capital AS have entered into a management contract, according to which EfTEN Capital AS shall receive a success fee in the amount of 20% of the sales and acquisition price of investment properties, if the hurdle rate is at least 10% on an annual basis. The success fee shall be calculated on all real estate transactions as a whole, i.e., if there is an investment property in the whole that is sold under the cost of its acquisition, the success fee calculated on objects sold with profit shall be decreased in the amount of 20% of those sales losses of the objects sold under acquisition cost. As at , the Group has accounted for the success fee liability in the amount of EUR 2,104 thousand ( : EUR 1,092 thousand). In 2013, EfTEN Kinnisvarafond AS also paid to EfTEN Capital AS a success fee of EUR 15 thousand for the sale of the immovable at Narva mnt 59. The success fee related to the sale of the registered immovable on Lõkke 4 in the amount of EUR 247 thousand has been reflected under the Group s long-term success fee liabilities as at The bases of accrual accounting of this success fee are the valuations of fair price of investment properties as at and The expense on changes in success fee shall be recognized under the Group s general management costs (see Note 7). 18 Financial instruments, management of financial risks The main financial liabilities of the Group are loan liabilities that have been taken to finance the investment properties of the Group. The Group s balance sheet also includes cash and short-term deposits, accounts receivables, other receivables, liabilities to suppliers and receivables and debts related to interest derivatives used to manage the interest risk (see Note 15). The table below indicates division of the Group s financial assets and financial liabilities by the types of financial instruments in the way these are presented in the consolidated balance sheet. Since some of the assets and liabilities in the Group s balance sheet include both financial and non-financial instruments, the table below also presents the book cost of the assets and liabilities that do not belong under financial instruments. 41

42 Book values of financial instruments Financial assets/liabilities in amortized cost Financial assets/liabilities at fair value Non-financial assets/ liabilities Residual value on balance sheet Cash and cash equivalents (Note 10) 19, ,314 Loans and receivables 19, ,314 Trade receivables (Note 11) Loans and receivables Other receivables, accrued income and prepayments Non-financial assets Derivative instruments (Note 15) Interest derivatives (recognized in hedge accounting) Total financial assets 19, ,497 incl. loans and receivables 19, ,497 incl. interest derivatives recognized in hedge accounting Loan liabilities (Note 14) 82, ,379 In amortized cost 82, ,379 Trade payables (Note 16) In amortized cost Derivative instruments (Note 15) Interest derivatives (recognized in hedge accounting) Other payables In amortized cost Prepayments, financial securities, success fee liability Non-financial liabilities Total financial liabilities 82, ,925 incl. the financial liabilities recognized in amortized cost 82, ,925 incl. interest derivatives recognized in hedge accounting

43 Financial assets/liabilities in amortized cost Financial assets/liabilities at fair value Non-financial assets/ liabilities Residual value on balance sheet Cash and cash equivalents (Note 10) 12, ,687 Loans and receivables 12, ,687 Trade receivables (Note 11) Loans and receivables Other receivables, accrued income and prepayments Non-financial assets Derivative instruments (Note 15) Interest derivatives (recognized in hedge accounting) Total financial assets 13, ,156 incl. loans and receivables 13, ,153 incl. interest derivatives recognized in hedge accounting Loan liabilities (Note 14) 42, ,582 In amortized cost 42, ,582 Trade payables (Note 16) In amortized cost Derivative instruments (Note 15) Interest derivatives (recognized in hedge accounting) Other payables In amortized cost Prepayments, financial securities, success fee liability - - 1,306 1,306 Non-financial liabilities - - 1,306 1,306 Total financial liabilities 42, ,217 incl. the financial liabilities recognized in amortized cost 42, ,997 incl. interest derivatives recognized in hedge accounting The fair value of the financial assets and liabilities that is recognized in amortized cost in the tables above do not significantly differ from their fair value due to short deadlines. 43

44 Revenues and expenses of financial instruments 2013 Loans and receivables Interest derivatives recognized in hedge accounting Financial liabilities recognized in the method of amortized cost Total Interest revenue Interest expense (Note 9) ,459-1,688 Net result ,459-1, Loans and receivables Interest derivatives recognized in hedge accounting Financial liabilities recognized in the method of amortized cost Total Interest revenue Interest expense (Note 9) ,103 Net result ,093 In hedge accounting of the Group, it is based on the principle that risks should be taken in a balanced manner, taking into consideration the rules set by the Group and implementing hedge accounting measures according to the situation, thus achieving stable profitability of the Group and a growth in the value of shareholders assets. In making new investments, close evaluation is made on the solvency of clients, duration of rental contracts, possibility of replacing tenants and the risks of interests increasing. The terms and conditions of financing agreements are adjusted to the net cash-flow of each real estate object, ensuring enough free money for the Group and growth even after the financial liabilities have been fulfilled. In investing the Group s assets, the risk expectations of the Group s investors are taken as a basis, wherefore excessive risk-taking is unacceptable and suitable measures need to be applied for hedge accounting. The Group considers a financial risk to be risk that comes directly from making investment properties, including the market risk, liquidity risk and credit risk, thus decreasing company s financial capability or reducing the value of investments. Market risk Market risk is change in the fair value of financial instruments due to changes in market prices. Group s financial instruments influences by change in market prices the most are loan liabilities and interest derivatives. The main factor influencing these financial instruments is interest risk. Market risk interest risk Interest risk is the risk of change in cash-flows of future financial instruments due to changes in market interest rates. A change in market interest rates mainly influences long-term floating rate loan liabilities of the Group. As at , 99.6% of the Group s loan agreements had been entered into on the basis of a floating interest rate, 97.4% of which is related to 1-month EURIBOR. 2.6% of the loan liabilities entered into under a floating interest rate are connected with a 6 month EURIBOR and one owner loan taken by a joint venture has a fixed interest rate. 1 month EURIBOR fluctuated in 2013 between 0.109% to 0.245% (2012: 0.107% to 1.005%), that is, the maximum change during the year was 13.6 basis points (2012: 89.8 basis points). The analysis below illustrates sensitivity to interest rate fluctuations of the interest payments of loan contracts that are open to interest rate changes in 2013 if 1 month EURIBOR would have fluctuated by 50 basis 44

45 points up or down Change in interest rate in basis points Influence on net profit EURIBOR EURIBOR Liquidity risk Liquidity risk comes from potential changes in the financial situation, reducing the Group s ability to perform its liabilities in due time and in a correct manner. Group s liquidity is mostly influenced by the following circumstances: decrease or volatility of rental revenue, reducing the Group s ability to generate positive net cash-flows; vacancy on rental premises; difference in deadlines of assets and liabilities, and flexibility in changing them; marketability of long-term assets; volume and speed of real estate development activity; Financing structure. The purpose of the Group is to manage the net cash-flows in a manner that in making investment properties, foreign capital is included in no more than 70% of the investment acquisition cost and the coverage coefficient of the Group s debt would be higher than 1.2. As at , the share of interest-bearing debt liabilities of the Group from rent-producing investment properties was 58% ( : 56 %) and the debt coverage coefficient was 1.9 (2012: 1,7). The financing policy of the Group states that loan contracts for foreign capital issue are entered into for a long-term, also taking into consideration the maximum duration of the leasing contracts in these real estate objects. The table below summarizes information on maturity of realization of the Group s financial liabilities. As at Less than 1 month 2 4 months 4 12 months 2 5 years more than 5 years Total Interest bearing loan liabilities ,509 78, ,379 Trade payables Payables on interest derivatives Other payables Total financial liabilities 1, ,509 78, ,223 As at Less than 1 month 2 4 months 4 12 months 2 5 years more than 5 years Total Interest bearing loan liabilities ,259 38, ,582 Trade payables Payables on interest derivatives Other payables Total financial liabilities ,259 38, ,315 45

46 Credit risk Credit risk is a risk that comes from the inability of other contractual parties to fulfil their liabilities to the Group. The Group is open to credit risk due to its business operations (mainly from accounts receivable) and transactions with financial institutions, including by money on accounts, deposits and derivative instruments. Group s activity in preventing reduction of cash-flows due to credit risk and minimizing of such risk lies in everyday monitoring and guiding of clients payment conduct, enabling to implement the operatively necessary measures. Also, client contracts generally provide payment of rent at the beginning of calendar month, giving sufficient time for monitoring the clients payment discipline and ensuring existence of sufficient liquidity on accounts at the date of annuity payment of financing contracts. To manage risk, the Group has entered into an agreement with one of the anchor tenant, according to which the financial institution of the tenant shall guarantee rental payments throughout the rental period. Most of the rental contracts also stipulate an liability of paying securities, at the expense of which the Group can erase debts resulting from insolvency of a tenant. Group s companies generally enter into rental contracts only with parties that have been proven eligible for credit. The corresponding analysis of the client is carried out before entering into a rental contract. If it becomes evident that there is a risk of a tenant becoming insolvent, the Group assesses each receivable individually and decides whether the receivables should be declared unlikely to be received. In general, receivables that have exceeded the payment deadline by more than 60 days are considered unlikely to be received, except in cases when the Group has sufficient certainty as to receiving the receivable or there is a payment schedule for the receivable. Receivables against buyers are illustrated by the table below: Non-expired Expired, including up to 30 days days 16 8 more than 60 days 3 30 Doubtful reserve Accounts receivables, total The maximum credit risk of the Group has been provided in the following table: Cash and cash equivalents 19,314 12,687 Cash receivable 0 0 Accounts receivables Positive interest derivatives 0 3 Total maximum credit risk 19,497 13,156 46

47 Capital management The aim of the Group in capital management is to ensure the Group s ability to continue its operations to ensure investment return to shareholders and maintain the optimal capital structure. The Group continues to invest into properties that produce cash-flow and involves new equity in making investments. The investment policy of the Group prescribes that at least 30% of equity is invested into new real estate projects. The necessary equity volume is calculated individually for each investment, taking into consideration the volume of net cash-flows and loan payments of the investment and their proportion. After making an investment, the net profit on investment of any of the cash-flow producing investment property may not be less than 120% of the loan annuity payments. Free cash-flow of the Group enables to pay dividends in the average amount of 4-5% of the value of invested equity from In 2013, net dividends in the amount of EUR 1,400 thousand were distributed to the investors. In 2014, the management of EfTEN Kinnisvarafond will propose the shareholders to distribute EUR 2,445 thousand as dividends from the profit of Fair value The assets and liabilities are analysed by assessment methods in the table below. The assessment methods have been defined as follows: Level 1 exchange prices on the trading market; Level 2 assets and liabilities either directly or indirectly related to the prices determined on the trading market; Level 3 prices on a non-trading market. As at , the Group has no fair value assets that would belong to the group of Level 1 or Level 2 in finding of the value. All of the Group s investment properties have been reflected in fair value and belong to the group of Level 3 based on the assessment method. 19 Share capital In October 2013, EfTEN Kinnisvarafond AS issued 7,379,146 shares with the nominal value of EUR 0.6. A total of EUR 13,799 thousand was paid for the new shares in cash, whereat the share premium was EUR 9,372 thousand. In April 2013, EfTEN Kinnisvarafond AS issued 7,969,450 shares with the nominal value of EUR 0.6. A total of EUR 14,504 thousand was paid for the new shares in cash, whereat the share premium was EUR 9,723 thousand. In September 2012, EfTEN Kinnisvarafond AS issued 5,826,506 new shares with the nominal value of EUR 0.6. A total of EUR 9,672 thousand was paid in 2012 for the new shares in cash, whereat the part of share premium was EUR 6,176 thousand. In June 2012, EfTEN Kinnisvarafond AS issued 2,094,340 new shares with the nominal value of EUR 0.6. A total of EUR 3,330 thousand was paid in 2012 for the new shares in cash, whereat the part of share premium was EUR 2,073 thousand. In April 2012, EfTEN Kinnisvarafond AS issued 4,037,580 shares with the nominal value of EUR 0.6. A total of EUR 6,339 47

48 thousand was paid for the new shares in cash in 2012, whereat the share premium was EUR 3,916 thousand. In November and December 2011, EfTEN Kinnisvarafond AS issued 4,705,525 new shares with the nominal value of EUR 0.6, for which a total of EUR 6,900 thousand was paid in the end of 2011 and at the beginning of 2012, incl. a share premium of EUR 3,958. This issue of shares was registered in the commercial register at the beginning of The size of registered share capital of EfTEN Kinnisvarafond AS as at is EUR 24,243 thousand ( : EUR 15,034 thousand). The share capital consisted of 40,405,606 shares as at ( : 25,057,010 shares) with the nominal value of EUR 0.6 ( : the same). Without amending the articles of association, the undertaking may increase its share capital to EUR 60,137 thousand. 20 Contingent liabilities Unfinished court cases As at , there is an ongoing court action between a subsidiary of the Group and the lessee OÜ Rest Art Group. OÜ Rest Art Group has filed a non-proprietary receivable against the subsidiary of the Group for determination of the nullity of the lease contract, and a receivable for the compensation of damage in relation to performance of the right of security by the lessor, with the value of the action of EUR 267 thousand. The management of the Group deems this receivable unjustified. This dispute arises from breach of contract by the former lessee of a Group s subsidiary, and the legal consequences of the consecutive seizure of the lessee s property. As at , the court hearing of this financial receivable is in its early stages (no reply has been asked from the defending party). Potential income tax liability Retained earnings of the company as at 31 December 17,750 9,173 Potential income tax liability 3,728 1,926 Can be paid out as dividends 14,023 7,247 In calculating the maximum possible income tax liability, it has been presumed that the total of net dividends to be divided and the corresponding income tax expense may not exceed the distributable profit as at and Transactions with related parties EfTEN Kinnisvarafond AS considers the related parties to be: persons who own more than 10% of the share capital of EfTEN Kinnisvarafond AS; Board Members and companies owned by the Board Members of EfTEN Kinnisvarafond AS; Supervisory Board Members and companies owned by the Supervisory Board Members of EfTEN Kinnisvarafond AS; employees and companies owned by the employees of EfTEN Kinnisvarafond AS; joint venture Lepa Keskus OÜ; EfTEN Capital AS (fund management company). 48

49 The Group bought a management service from EfTEN Capital AS in 2013 in the amount of EUR 840 thousand (2012: EUR 443 thousand). EfTEN Kinnisvarafond AS did not purchase from other related parties or sell to other related parties other goods or services in 2013 or The Group had three employees in 2013 to whom remunerations in the total amount of EUR 94 thousand with taxes were accounted (2012: EUR 27 thousand). No remunerations were accounted or paid to the members of the Group s Management or Supervisory Board in 2013 or Parent s unconsolidated income statement The unconsolidated main accounts of the parent company have been prepared in concordance with the Estonian Accounting Act and are not separate financial reports in the meaning of IAS 27 Consolidated and Separate Financial Statements Sales revenue 1,767 1,621 Property operating expenses Gross profit 1,568 1,478 Marketing costs -3-2 Administrative expenses Other income Other expenses 0 0 Operating profit 1,026 1,429 Finance income and finance expenses 9,388 3,322 Profit before income tax 10,414 4,751 Income tax expense on dividends Net profit of the accounting year 10,239 4,646 Unconsolidated comprehensive income statement of the parent company Net profit of the accounting year 10,239 4,646 Other comprehensive profit/loss: Revaluation profit / loss of hedge accounting instruments Other comprehensive profit/loss Total comprehensive income of the accounting year 10,458 4,848 49

50 23 Parent s unconsolidated balance sheet ASSETS Cash and cash equivalents 10,319 10,616 Receivables and accrued income 920 2,141 Total current assets 11,240 12,757 Non-current assets Long-term financial investments 59,181 24,176 Investment properties 0 13,998 Long-term receivables on loans 11, Total non-current assets 70,522 39,059 TOTAL ASSETS 81,761 51,816 Loan liabilities 0 2,334 Derivative instruments Payables Total short-term liabilities 22 2,681 Loan liabilities 0 4,599 Deposits received from tenants 0 3 Success fee liability Total long-term liabilities 247 5,004 Total liabilities 270 7,685 Share capital 24,243 15,034 Share premium 38,989 19,894 Mandatory capital reserve Hedge accounting reserve Retained earnings 17,779 9,173 Total equity 81,492 44,130 TOTAL LIABILITIES AND EQUITY 81,761 51,816 50

51 24 Parent s unconsolidated statement of cash-flows Cash-flows from business operations Net profit 10,239 4,646 Net profit adjustments: Interest revenue and interest expense Profit/loss from changes in the fair value of subsidiaries or joint ventures -8,729-3,643 Revaluation profit/loss of investment properties Sale profit/loss of investment properties Dividends received Change in the success fee liability Income tax proceeds of the company Cash-flow from business operations before changes in working capital 683 1,017 Changes in receivables and liabilities related to business operations Total cash-flows from operations 651 1,033 Cash-flows from investing activities Sale of investment properties 14,185 0 Acquisition of subsidiaries and joint ventures -29,498-11,258 Change in the Group s account receivables 1,248-1,323 Loans given -9,753 0 Repayments of loans given Dividends received Interest received Total cash-flows from investing activities -22,962-12,432 Cash-flows from financing activities Loans received 3,180 0 Loan repayments -7, Interest paid Dividends paid -1, Income tax paid on dividends Issuing of shares 28,303 21,740 Total cash-flows from financing activities 22,015 20,425 TOTAL CASH-FLOWS ,026 Cash and cash equivalents at the beginning of the period 10,616 1,590 Change in cash and cash equivalents ,026 Cash and cash equivalents at the end of the period 10,319 10,616 51

52 25 Parent s unconsolidated statement of changes in equity Share capital Share premium Mandatory capital reserve Hedge accounting reserve Retained earnings Total Balance ,036 3, ,075 13,547 Issuing of shares 9,998 16, ,241 Capital issue costs Reduction of share capital on euro conversion Transfers to mandatory capital reserve Total profit of the accounting year ,646 4,848 Balance ,034 19, ,173 44,131 Issuing of shares 9,209 19, ,303 Announcement of dividends ,400-1,400 Transfers to mandatory capital reserve Total profit of the accounting year ,239 10,458 Balance ,243 38, ,779 81,492 For additional information on the changes related to shares, see Note 19. Adjusted unconsolidated equity of the parent company (to account for correspondence with the requirements set in the Commercial Code) is as follows: Unconsolidated equity of the parent company 81,492 44,131 Value of subsidiaries or joint ventures in unconsolidated balance of the parent company (minus) -59,181-24,176 Value of subsidiaries or joint ventures accounted in the equity method (plus) 59,152 24,179 Total 81,462 44,134 52

53 26 Group s structure as at Subsidiaries Investment property: 100% EfTEN SPV1 OÜ Ülikooli 6 100% EfTEN SPV2 OÜ Lauteri 5 100% EfTEN SPV3 OÜ UKU Centre 100% EfTEN SPV4 OÜ Joint building of Rakvere police and 100% EfTEN SPV5 OÜ Pärnu mnt % EfTEN SPV6 OÜ Pärnu mnt % EfTEN SPV7 OÜ Mustika Centre (centre) E f T E N K i n n i s v a r a f o n d A S 100% 100% 100% EfTEN SPV8 OÜ EfTEN SPV9 OÜ EfTEN SPV10 OÜ Mustika Centre (Prisma) Kadaka tee 63 Laki % EfTEN SPV12 OÜ EPI portfolio 100% EfTEN SPV14 OÜ Võru Rautakesko 100% EfTEN SPV15 OÜ Tallinna Külmhoone 100% EfTEN SPV16 OÜ Narva Prisma 100% EfTEN Stabu 10 SIA Stabu 10 office building 100% EfTEN Jelgava SIA Jelgava shopping centre Joint ventures Investment property: 50% EfTEN SPV11 OÜ Palace Hotel 50% Lepa Keskus OÜ Lepa Centre in Pärnu 53

54 PROFIT DISTRIBUTION PROPOSAL The Management Board makes the following profit distribution proposal at EfTEN Kinnisvarafond AS s general meeting (in EUR): Retained earnings as at ,750,368 Allocation to mandatory capital reserve -521,300 Division of dividends -2,444,540 Retained earnings after allocations 14,784,528 Viljar Arakas Member of the Management Tõnu Uustalu Member of the Management 28 February

55 SIGNATURES OF THE MEMBERS OF THE BOARD AND SUPERVISORY BOARD TO THE ANNUAL REPORT OF 2013 We hereby verify the correctness of data presented in the 2013 Annual Report of EfTEN Kinnisvarafond AS. Arti Arakas Chairman of the Supervisory Board Siive Penu Member of the Supervisory Board Rain Lõhmus Member of the Supervisory Board Sander Rebane Member of the Supervisory Board Jaan Pillesaar Member of the Supervisory Board Laire Piik Member of the Supervisory Board Martin Hendre Member of the Supervisory Board Tauno Tats Member of the Supervisory Board Viljar Arakas Member of the Management Board Tõnu Uustalu Member of the Management Board 55

56 Distribution of revenue in accordance with the Classification of Economic Activities Classification of Economic Activities code 2013 Revenue % Main field of activity Renting and operating of own or leased real estate ,079 99% yes 56

57 57

58 58