Consolidated Annual Report 2014

Transcription

1 Consolidated Annual Report 2014 EfTEN Kinnisvarafond AS Commercial register number: Beginning of financial year: End of financial year: Address: A. Lauteri 5, Tallinn address: Website address:

2 Table of contents MANAGEMENT REPORT Financial overview Real estate portfolio Investments in real estate in 2014 Valuation of investment property Information on shares Outlook for 2015 Management FINANCIAL STATEMENTS 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 consolidated financial statements 1 General information 2 Statement of compliance and basis for preparation 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 Cost of services sold 6 Marketing costs 7 General and administrative expenses 8 Other income and other expenses 9 Loss from joint ventures using the equity method 10 Finance costs 11 Income tax 12 Cash and cash equivalents 13 Receivables and accrued income 14 Investment property 15 Borrowings 16 Payables and prepayments 17 Success fee liability 18 Financial instruments, management of financial risks 19 Share capital 20 Contingent liabilities 21 Related party transactions 22 Provisions 23 Parent company s separate income statement 24 Parent company s separate balance sheet 25 Parent company s separate statement of cash flows 26 Parent company s separate statement of changes in equity Profit allocation proposal Signatures of the members of the management board and supervisory board to the 2014 annual report Distribution of revenue in accordance with the Estonian Classification of Economic Activities Independent auditor s report

3 Financial overview The consolidated sales revenue of EfTEN Kinnisvarafond AS in 2014 was EUR million, growing by 43% in a year. The net profit of the group in the same period was EUR million. Net profit grew by 49% compared to In 2014, net profit included a net gain on revaluation of investment property (gain on revaluation of investment property less change in the success fee liability reserve) in the amount of EUR 6.8 million (2013: EUR 4.3 million). The consolidated gross profit margin in 2014 was 94% (2013: 92%), therefore, expenses directly related to management of properties (incl. land tax, insurance, maintenance and improvement costs) accounted for 6% of the sales revenue in 2014 (2013: 8%). Based on this indicator, EfTEN Kinnisvarafond is the most efficient real estate fund in the Baltic States. The group s expenses related to properties, marketing costs, general expenses, other income and expenses accounted for 18.3% of the revenues in The respective indicator was 19.2% in EfTEN Kinnisvarafond is the most efficient real estate fund in the Baltic States. EUR million Rental revenue, other fees from properties 14,409 10,043 Expenses related to investment properties, incl. marketing costs -1,110-0,964 Interest expense and interest income -1,848-1,655 Net rental revenue less finance costs 11,451 7,425 Management fees -1,080-0,805 Other revenue and expenses -0,448-0,163 Profit before change in the value of investment property, change in the success fee liability, profits/losses from joint ventures and income tax expense 9,924 6,456 RAF Centrs On 25th of July, RAF Centrs, a shopping centre developed by EfTEN Capital was opened in Jelgava. The ribbon is cut by Jelgava mayor, Andris Ravins (left) and EfTEN Capital SIA CEO Viktors Savins. 3

4 As at , the group total assets were in the amount of EUR million ( : EUR million), including fair value of investment property, which accounted for EUR million of the total assets ( : EUR million). In terms of total assets, EfTEN Kinnisvarafond is the largest commercial real estate fund operating exclusively in the Baltic States EUR million Investment property 189, ,844 Other non-current assets 2,724 3,465 Current assets, excluding cash 0,620 0,619 Net debt -100,953-65,466 Net asset value (NAV) 92,084 81,463 Net asset value (NAV) per share (in euros) 2,3377 2,0161 The net asset value per share of EfTEN Kinnisvarafond AS increased by 16% in a year as a result of new investments, low interest rates and efficient management of costs. Return on invested capital (ROIC) in the year 2014 was 24.6% (2013: 21.2%). The increase in competitiveness of the group is supported by access to flexible financing conditions. In 2014, the Group refinanced its existing loans and the transactions resulted in the receipt of additional funds for investment in the amount of EUR 6.3 million. The average interest rate of the Group s loan agreements at the end of the year was 1.9% (2013: 2.1%) and the LTV (Loan to Value) ratio was 59% (2013: 56%). Return on invested capital (ROIC) in the year 2014 was 24.6%. The dividend policy of EfTEN Kinnisvarafond AS provides that the Group will pay out 80% of the free cash flow to shareholders as (gross) dividends in each accounting year. In 2014, EfTEN Kinnisvarafond AS paid out (net) dividends to shareholders in the amount of EUR 2.44 million, equal to 6.05 cents per share. In the previous year, EUR 1.4 million, equal to 5.59 cents per share, was paid out as (net) dividends. In addition in 2014 EfTEN Kinnisvarafond AS distributed the amount of EUR 2.1 million to shareholders as a return of capital, increasing the amount distributed to shareholders by an additional 5.2 cents per share. Per annum or as at December ROE, % (net profit of the period / average equity of the period) 17,5 16,3 ROA, % (net profit of the period / average assets of the period) 8,2 8,0 ROIC, % (net profit of the period / invested capital of the period 1 ) 24,6 21,2 DSCR (EBITDA/(interest expenses + scheduled loan payments) 1,9 1,9 1 The average invested capital of the period is the paid-in share capital of EfTEN Kinnisvarafond AS s equity, and the share premium. The indicator does not show the actual investment of the funds raised as equity. 4

5 EfTEN Kinnisvarafond AS Consolidated Annual Report 2014 Real estate portfolio The Group invests in commercial real estate with a strong and longterm tenant base. At the end of 2014, the Group had 21 commercial investment properties (2013: 21) with a fair value as at the balance sheet date of EUR million and acquisition cost of EUR 174,033 million. In addition, a joint venture of the Group owns the hotel Palace in Tallinn with a fair value of EUR 9.8 million as at The real estate portfolio of the Group is divided into following sectors: retail premises 40%; 6 investments office premises 24%; 8 investments storage and manufacturing 27%; 5 investments other (hotel and government) 8%; 2 investments At the end of 2014, the Group had 21 commercial investment properties. Hotel Palace in Tallinn Lāčplēša iela 20A office building in Riga 5

6 Investment property, as at Group s ownership interest, % Net leasable area, m² Rental revenue per annum, EUR thousand Occupancy, % Tallinn Cold Storage (Tallinna Külmhoone) Võru Rautakesko UKU Centre Rakvere Police Building Lauteri Ülikooli Pärnu mnt Pärnu mnt Mustika Centre RAF Centrs Narva Prisma Laki Kadaka tee Stabu 10 office building Kuuli 10/Punane Tammsaare tee Rautakesko Betooni 1a Betooni Lāčplēša iela 20A office building Nordic Technology Park Hotel Palace The weighted average expiration term of the lease agreements of investment property owned by the Group is 4.9 (2013: 6.1) years and as at the Group has a total of 285 (2013: 173) tenants. Contractual revenue generated by 14 customers accounts for 61.3% of the consolidated rental revenue. Object % of the consolidated rental revenue Prisma Peremarket 15,3 Rautakesko AS 9,9 Eesti Energia 5,4 Logistika Pluss 5,2 DHL Estonia AS 4,8 Riigi Kinnisvara 3,9 Premia Tallinna Külmhoone 3,9 Arvato Services Estonia 2,0 Äripäev 2,2 Kinnisvaravalduse (RIMI) 1,9 HANZA Mechanics Tartu 1,9 Kwintet Production SIA 1,6 Stora Enso Packaging AS 1,6 Mediq Eesti OÜ 1,7 Others 38,7 6

7 EfTEN Kinnisvarafond AS Consolidated Annual Report 2014 Investments in real estate in 2014 In light of the real estate cycle and the quick recovery of the Baltic commercial real estate market from crisis, the fund is experiencing increasing difficulty in finding new investment projects meeting its conservative investment criteria. Whereas in the previous financial year in 2013 the fund made 11 new investments, it only made 3 new investments in the year 2014 in the logistics and warehouses segment. The fund acquired the DHL logistics centre in Tallinn, the Betooni 6 logistics centre and the Nordic Technology Park in Riga. The best risk-return ratio in commercial real estate was available in the previous financial year in the segment of manufacturing and logistics. In addition, the fund successfully completed extensive renovation of Palace Hotel and the construction of a shopping centre called RAF Centrs in Latvia. Both development projects corresponded to the expectations of management in terms of their end result. In December 2014, a subsidiary of the fund was announced as the winner of the enforcement proceedings auction for an office building located at Lāčplēša iela 20A, Riga. After the court approves the results of the auction in the first quarter of the year 2015, the fund will become the owner of a prominent Class A building in the centre of Riga, which was built in the year In 2014, the fund made 3 new investments in logistics and warehousing. In light of developments in the real estate market, the fund has started to exit from smaller projects. A total of 4 investments were sold in the year Three industrial and warehouse properties were sold as part of one transaction Stora Enso, Hanza Mechanics and Mediq Eesti buildings in Tallinn, Tartu and Saue. At the end of the year, the fund s 50% ownership interest in the Lepa Keskus OÜ joint venture was sold to the joint venture partner. Both transactions were very successful for the fund, as the return on equity after success fee reserve was 55.8% per annum for the first transaction and 25.9% for Lepa Centre. Nordic Tehcnology Park in Riga 7

8 A summary of the sale of investment property in the year 2014 is provided below: 2014 Industrial and warehouse buildings Lepa Centre Date of acquisition Value upon sale, Holding period, in years 1,3 5,1 Capital invested, s Annualised return on equity 55,8% 25,9% Return multiple 1,6 3,9 The Group will continue selling smaller investment properties in Valuation of investment property EfTEN Kinnisvarafond revalues its investment properties twice a year in the month of June and in the month of December. In the year 2014, the Group s investment property was valued by Colliers International Advisors OÜ. As a result of revaluation, the total value of investment property increased by 4.9% (2013: 3.4%) and the Group recognised a gain from fair value adjustment on investment property in the amount of EUR 8,364 (2013: 5,361) thousand, also inclusive of the change in fair value of the investment property sold in 2014 in the amount of EUR 1,075 thousand. The independent appraiser of the Group values the investment properties on an individual basis using the discounted cash flow method. The estimates of the cash flows of all properties have been updated to determine the fair value and the discount rates and exit yields have been differentiated depending on the location of the properties, their technical condition and the tenant risk level. In view of the changes in the commercial real estate market of the Baltic States and the favourable financing conditions, the exit yields have slightly decreased in 2014, falling within in the range of 8.0% - 9.0%. The discount rates applied to cash flows have also decreased for the same reason, falling within the range of 9.2% to 10.5% depending on the quality level of the property. According to the estimated updated rental revenue, the net yield based on the expected net rental revenue in 2015 will be 8.1%. As a result of revaluation, the total value of investment property increased by 4.9% (2013: 3.4%). Among the investments of the Group in real estate so far, the best in terms of the rate of return has been an investment in 2010 in the Rakvere police and rescue building, for which the net yield on the initial investment, based on the expected net cash flow in 2015 is 11.1%. It is followed by the segment of logistics and manufacturing space with an 8.9% net yield, closely followed by the segment of retail premises where the expected net cash flow to the acquisition cost of investments in 2015 is 8.8%. The respective yield level of the office space segment has been 8.5%. 8

9 Information on shares As at , payments made to the share capital of the Group total EUR million ( : EUR million). In 2014, EfTEN Kinnisvarafond AS reduced share capital as a result of exiting from projects in the previous year in the total amount of EUR million. No new shares were issued in the year Number of shares outstanding at the beginning of the period Issue of shares during the period Shares retired during the period Number of shares outstanding at the end of the period NAV, 2,4000 2,2000 2,0000 1,8000 1,6000 1,4000 1,2000 1,0000 0, Share Net Asset Value , , , , , , NAV per share, EUR 2,3377 2,0161 1,7613 1,6140 1,2315 1,0123 0,6000 Annual increase in NAV 16% 14% 9% 31% 22% 69% - Increase in NAV over 2 years Increase in NAV over 3 years Increase in NAV over 4 years Increase in NAV over 5 years Increase in NAV over 6 years 33% 25% 43% 59% 105% % 64% 74% 169% % 99% 194% % 236% % Shareholder structure of EfTEN Kinnisvarafond AS as at Ownership percentage in share capital LHV Pension Funds 33,5 Danske Pension Funds 16,7 Nordea Pension Funds 3,1 Ambient Sound Investments OÜ 6,3 Remaining legal entities 34,8 Individuals 5,6 9

10 Outlook for 2015 As a result of the expansionary monetary policy of the European Central Bank, continued declines in the rates of return from commercial real estate can be expected. Considering the geographic location of the Baltic States in the periphery of the eurozone and the increased tension in the geopolitical situation in the neighbouring region, the declines in the rates of return in the Baltic States have been more modest than in the larger real estate markets of Central Europe. Due to a high price level of other asset classes, increasing amounts of capital are nevertheless flowing into cash flow generating commercial real estate. In light of the above, EfTEN Kinnisvarafond is experiencing increasing difficulties in sourcing suitable investments in the form of completed buildings. We are seeing new investment opportunities above all in taking limited development risk in situations where we acquire suitable properties with detailed plans that have a lease agreement in place with an anchor tenant. In addition, we are planning to execute our first transactions in Lithuania to increase the geographical coverage of the fund. As a result of the expansionary monetary policy of the European Central Bank, continued declines in the rates of return from commercial real estate can be expected. Management The supervisory board of EfTEN Kinnisvarafond AS gathered on five occasions in 2014 and on two occasions decisions were adopted without summoning a 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. In the year 2014, such transactions were the expansion of the rental premises used by DHL Estonia OÜ, a tenant of the fund s subsidiary EfTEN SPV17 OÜ, and the incorporation of potential losses arising from a court case involving the subsidiary of the fund, EfTEN SPV7 OÜ, as part of contingent liabilities of the Group. In addition, the supervisory board of the fund gave its approval to a change in the loan financing and rental revenue model of a joint venture of the fund, EfTEN SPV11 OÜ. Two general meetings of shareholders were held in At the annual general meeting of shareholders held at 15 April 2014, the shareholders of the fund unanimously decided to approve the annual report and to pay out (net) dividends in the amount of EUR 2,444,540. In addition, it was unanimously decided to reduce the share capital by EUR 608,541 through the cancellation of shares, to appoint Aktsiaselts PricewaterhouseCoopers as the new auditor for the next three years and to make the changes in the supervisory board that are detailed below. At the second, extraordinary general meeting of shareholders held at 3 December 2014, shareholders unanimously decided to appoint AS Swedbank as the depositary of the fund. The supervisory board of the fund is comprised of eight members: Arti Arakas (chairman of the supervisory board), Jaan Pillesaar, Siive Penu, Laire Piik, Sander Rebane, Martin Hendre, Tauno Tats and Rain Lõhmus (member of the supervisory board until ). At the annual general meeting of shareholders, Rain Lõhmus, member of the supervisory board, was removed from the supervisory board and Erkki Raasuke was appointed as a new member of the supervisory board. The management board of the fund is comprised of two members: Viljar Arakas (fund manager) and Tõnu Uustalu (investments manager of the fund). In accordance with an asset management contract, EfTEN Capital AS acts a fund manager in the management of the assets of EfTEN Kinnisvarafond. At 20 November 2014, the management board of the Financial Supervisory Authority granted to EfTEN Capital AS a licence to operate as an alternative fund manager. As at , the Group had two employees who were remunerated including taxes in the amount of EUR three thousand (2013: EUR 19 thousand). No remuneration was due or paid to the members of the Group s management or supervisory board in 2014 or Members of the Group s management board are employed by EfTEN Capital AS, the company providing asset management services to the Group, and expenses related to management board members activities are included in management services. 10

11 Financial statements of the consolidation group CONSOLIDATED INCOME STATEMENT Notes restated* Revenue Cost of services sold Gross profit Marketing costs General and administrative expenses Other income Other expenses Operating profit Loss from joint ventures using the equity method Finance income Finance costs Profit before income tax Income tax expense Net profit for the financial year CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME restated* Net profit for the financial year Other comprehensive income (loss): Gain (loss) from revaluation of hedging instruments Total other comprehensive income (loss) Total comprehensive income for the financial year * The Group has restated the comparative information of 2013 as a result of a change in accounting method for proportional consolidation of joint ventures. Please see Note 2.1 for more detailed information on the effect of change in accounting policies. 11

12 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes restated* restated* ASSETS Cash and cash equivalents Derivative instruments Receivables and accrued income Prepaid expenses Total current assets Long-term receivables Investments in joint ventures Investment property Property, plant and equipment Total non-current assets TOTAL ASSETS LIABILITIES AND EQUITY Borrowings Derivative instruments Payables and prepayments Total current liabilities Borrowings Other long-term liabilities Success fee liability Deferred income tax liability Long-term provisions Total non-current liabilities Total liabilities Share capital Share premium Statutory reserve capital Hedging reserve Retained earnings Total equity TOTAL LIABILITIES AND EQUITY * The Group has restated the comparative information of 2013 as a result of a change in accounting method for proportional consolidation of joint ventures. Please see Note 2.1 for more detailed information on the effect of change in accounting policies. 12

13 CONSOLIDATED STATEMENT OF CASH FLOWS Notes restated* Net profit Adjustments to net profit: Gain (loss) from joint ventures Finance income Finance costs Gain (loss) from revaluation of investment property 8, Change in the success fee liability Depreciation, amortisation and impairment Income tax expense Total adjustments with non-cash changes Cash flow from operations before changes in working capital Change in receivables and payables related to operating activities 13, Net cash generated from operating activities Purchase of property, plant and equipment -8-6 Purchase of investment property Proceeds from sale of investment property Acquisition of subsidiaries Sale of joint venture Loans granted Repayment of loans granted Dividends received Interest received Net cash generated from investing activities Loans received Loan repayments on sale of investment properties Scheduled loan repayments Interest paid Proceeds from issue of shares Repurchase of shares Dividends paid Income tax paid on dividends Net cash generated from financing activities NET CASH FLOW Cash and cash equivalents at the beginning of the period Change in cash and cash equivalents Effect of the change in exchange rate on cash and cash equivalents 0-5 Cash and cash equivalents at the end of the period * The Group has restated the comparative information of 2013 as a result of a change in accounting method for proportional consolidation of joint ventures. Please see Note 2.1 for more detailed information on the effect of change in accounting policies. 13

14 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital Share premium Statutory reserve capital Hedging reserve Retained earnings Total Balance as at Proceeds from issue of ordinary shares Announcement of dividends Transfers to statutory reserve capital Comprehensive income for the financial year Balance as at Reduction of share capital Announcement of dividends Transfers to statutory reserve capital Comprehensive income for the financial year Balance as at For additional information on share capital, please see Note

15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 General information The consolidated financial statements of EfTEN Kinnisvarafond AS and its subsidiaries for the financial year ended 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 prepared by the Management Board and approved by the Supervisory Board shall be approved at the general meeting of shareholders. These consolidated financial statements form a part of the annual report to be approved by the shareholders and they serve as a basis for the decision concerning the distribution of profit. Shareholders may decide not to approve the annual report, which has been prepared by the management board and approved by the supervisory board, and may demand that a new annual report be prepared. EfTEN Kinnisvarafond AS (Parent company) is a company registered and operating in Estonia. The structure of EfTEN Kinnisvarafond AS Group as at is as follows (also see Note 3): SUBSIDIARIES Investment property: 100% EfTEN SPV1 OÜ Ülikooli 6 100% EfTEN SPV2 OÜ Lauteri 5 100% EfTEN SPV3 OÜ UKU Keskus 100% EfTEN SPV4 OÜ Rakvere Police and rescue building 100% EfTEN SPV5 OÜ Pärnu mnt % EfTEN SPV6 OÜ Pärnu mnt % EfTEN SPV7 OÜ Mustika retail centre (centre) 100% EfTEN SPV8 OÜ Mustika retail centre (Prisma) EfTEN Kinnisvarafond AS 100% 100% 100% 100% EfTEN SPV9 OÜ EfTEN SPV10 OÜ EfTEN SPV12 OÜ EfTEN SPV14 OÜ Kadaka tee 63 Laki 24 Tammsaare tee 49, Tallinn; Kuuli 10, Tallinn Võru Rautakesko 100% EfTEN SPV15 OÜ Premia Foods cold storage 100% EfTEN SPV16 OÜ Narva Prisma 100% EfTEN SPV17 OÜ Betooni 1a, Tallinn; Betooni 6, Tallinn 100% EfTEN Stabu 10 SIA Stabu 10, Riia 100% EfTEN Jelgava SIA RAF Centrs 100% 100% Emilix SIA EfTEN NTP SIA 50% Lāčplēša 20a, Riga Nordic Technology Park JOINT VENTURES Investment property: EfTEN SPV11 OÜ Hotel Palace 15

16 2 Statement of compliance and basis for preparation The consolidated financial statements of EfTEN Kinnisvarafond AS and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements of the Group are presented in thousands of euros. In the preparation of the financial reports, the cost method has been used as a basis, unless stated otherwise (for example investment property is measured at fair value). 2.1 Changes in the accounting policies and presentation Adoption of new or revised standards and interpretations The following new or revised standards and interpretations became effective for the Group from 1 January IFRS 11 Joint Arrangements (standard will become effective for annual periods beginning on or after 1 January 2014). The standard will replace the standard IAS 31 Interests In Joint Ventures and the interpretation SIC-13 Jointly Controlled Entities Non-Monetary Contributions by Venturers. Changes in the concepts have reduced the types of joint arrangements to two - a joint operation and a joint venture. The option to select proportional consolidation as the accounting method for joint ventures has been eliminated. Equity accounting is mandatory for participants in joint ventures. The application of the standard had the following impact on the Group s income statement, balance sheet and cash flow indicators in the year 2013: 2013 Prior to adjustment Adjustment After adjustment Revenue Cost of services sold Gross profit Marketing expenses General and administrative expenses Other income Other expenses Operating profit Loss from joint ventures using the equity method Finance income Finance costs Profit before income tax Income tax expense on dividends Net profit for the financial year

17 Prior to adjustment Adjustment After adjustment Prior to adjustment Adjustment After adjustment ASSETS Cash and cash equivalents Derivative instruments Receivables and accrued income Prepayments Total current assets Long-term receivables Investments in joint ventures Investment property Property, plant and equipment Total non-current assets TOTAL ASSETS LIABILITIES AND EQUITY Borrowings Derivative instruments Payables and prepayments Total current liabilities Borrowings Tenant security deposits Success fee liability Total non-current liabilities Total liabilities Total equity TOTAL LIABILITIES AND EQUITY

18 2013 CASH FLOW STATEMENT Prior to adjustment Adjustment After adjustment Net profit Adjustments to net profit: Total adjustments with non-cash changes Cash flow from operations before changes in working capital Change in receivables and payables related to operating activities Net cash generated from operating activities Net cash generated from investing activities Net cash generated from financing activities NET CASH FLOW Cash and cash equivalents at the beginning of the period Change in cash and cash equivalents Effect of the change in exchange rate on cash and cash equivalents Cash and cash equivalents at the end of the period

19 IFRS 12, Disclosure of Interest in Other Entities (effective for annual periods beginning on or after 1 January 2014). The standard applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 sets out the required disclosures for entities reporting under the two new standards: IFRS 10, Consolidated financial statements, and IFRS 11, Joint arrangements, and replaces the disclosure requirements currently found in IAS 28 Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including (i) significant judgements and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, (ii) extended disclosures on share of non-controlling interests in group activities and cash flows, (iii) summarised financial information of subsidiaries with material non-controlling interests, and (iv) detailed disclosures of interests in unconsolidated structured entities. The Group has evaluated the effect of the application of the standard and has disclosed in these financial statements the management judgments concerning control or significant influence over subsidiaries and joint ventures. IAS 28 (revised in 2011) Investments in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2014). The standard was revised following the issue of IFRS 11 and it now includes the requirements for joint ventures, as well as associates, to be equity accounted. Due to the application of the standard, the Group has restated the indicators of the 2013 income statement and the balance sheet as at Profit accounted for using the equity method in the year 2013 amounted to a total of EUR -260 thousand and the value of joint ventures as at in the balance sheet of the Group amounted to a total of EUR 2,805 thousand. Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27 (effective for annual periods beginning on or after 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity s investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The management of the Group has evaluated whether their activities meet the definition of an investment entity and finds that EfTEN Kinnisvarafond AS does not meet the definition of an investment entity because it exhibits the characteristics of a real estate company rather than those of purely an investment entity. Although the investors in EfTEN Kinnisvarafond AS also expect capital appreciation and profit from ongoing business activities on their invested capital, EfTEN Kinnisvarafond also assumes development risks to a material extent in its investments, which are mainly characteristics of a conventional real estate company. In addition, according to IFRS 10, an investment entity should make direct investments in companies that are measured at fair value. In the case of the parent company EfTEN Kinnisvarafond AS, the measurement of fair value is indirect assets that are within the subsidiaries of EfTEN Kinnisvarafond AS are measured at fair value and thereby the fair value of the subsidiaries is determined, which may not be the final market value of the subsidiary, however. The business activities of the Group are also evaluated using rental revenue, profit margins, assets and other financial indicators used to evaluate real estate companies, which cannot be accomplished solely based on the fair value of subsidiaries. There are no other new or revised standards or interpretations that are effective for the first time for the financial year beginning on or after 1 January 2014 that would be expected to have a material impact to the Group. 19

20 New accounting pronouncements Certain new or revised standards and interpretations have been issued that are mandatory for the group s annual periods beginning at or after 1 January 2015, and which the group has not early adopted. Annual Improvements to IFRSs 2013 (standard will become effective for annual periods beginning on or after 1 January 2015). The improvements consist of changes to four standards, of which IAS 40 is relevant to the Group. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination.the Group has evaluated the effect of the amendments on its financial statements and finds that the investment property acquired by the Group does not constitute a business combination because a business has not been acquired. According to the judgment of the Group, a business involves the assumption of financial policy, operational policy and processes whereas the investment property acquired by the Group constitutes assets to which the financial policy and operational policy of the Group are applied in order to obtain economic benefits from the assets. Equity Method in Separate Financial Statements (Amendments to IAS 27), (effective for annual periods beginning on or after 1 January 2016; not yet adopted by the EU). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Investments in subsidiaries and joint ventures are measured at fair value in the separate financial statements of the parent company of the Group. The Group will evaluate the potential need for a change in accounting policy during the year Annual Improvements to IFRSs 2014, (effective for annual periods beginning on or after 1 January 2016; not yet adopted by the EU). The amendments impacts four standards, of which the amendment to IAS 34 is relevant to the Group, which requires a cross reference from the interim financial statements to the location of information disclosed elsewhere in the interim financial report. The Group already uses cross references in its interim financial reports that have been disclosed previously, therefore this amendment does not have any effect on the presentation of the Group s financial results. Disclosure initiative IAS 1 amendments, (effective for annual periods beginning on or after 1 January 2016; not yet adopted by the EU). The amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The Group will evaluate the effect of this amendment during the year There are no other new or revised standards or interpretations that are not yet effective that would be expected to have a material impact on the Group. 2.2 Summary of the most important accounting principles Management s critical estimates and judgements The preparation of consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses, and the disclosure of contingent assets and contingent liabilities. Although estimates and underlying assumptions are reviewed on an ongoing basis and they are based on historical experience and expectations of future events that are believed to be reasonable under the circumstances, actual results may differ from the estimates. Information about management s critical judgements and estimates that have a material effect on the amounts reported in the financial statements is provided below. 20

21 2.2.1 Estimation uncertainty The estimates made by management are based on historical experience and the information that has become available by the date of preparation of the financial statements. Therefore there is a risk with the assets and liabilities presented at the balance sheet date, and the related revenue and expenses, that the estimates applied need to be revised in the future. The key sources of estimation uncertainty that have a significant risk of causing material restatements to the financial statements are described below. a) Determination of the fair value of investment property At each balance sheet date, investment properties are measured at their fair values. Starting from the year 2014, the Group s investment property is valued by Colliers International Advisors OÜ. The independent appraiser of the Group values the investment properties on an individual basis using the discounted cash flow method. All of the investment properties owned by the Group generate (or will start to generate when they are completed) rental revenue, therefore the applied method best indicates the fair value of the investment properties among the alternatives (comparison method for example). The estimates of the cash flows of all properties have been updated to determine the fair value and the discount rates and exit yields have been differentiated depending on the location of the properties, their technical condition and the tenant risk level. In view of the changes in the commercial real estate market of the Baltic States and the favourable financing conditions, the exit yields have slightly decreased in 2014, falling within in the range of 8.0% to 9.0%. The discount rates applied to cash flows have also decreased for the same reason, falling within the range of 9.2% to 10.5% depending on the quality level of the property. Additional information on the assumptions and sensitivity used in valuation can be found in Note 14. b) Judgments concerning the existence of control or significant influence over other entities The Group owns 100% of all of its subsidiaries and only the members of the management board of the Group s parent entity are included in governance bodies of subsidiaries. Hence, the Group has full control over its subsidiaries in its distribution of profit and adoption of management decisions. The Group has a 50% ownership interest in the joint ventures that the Group is in and the members of the management boards of joint ventures also overlap with the management board members of the Group s parent entities. Any decisions in joint ventures are made in accordance with agreements with the approval of both shareholders, therefore the Group has joint control over joint ventures Classification of real estate Items of real estate (properties) are classified as investment property or property, plant and equipment both on initial recognition and on any subsequent reclassification based on management s intentions regarding further use of the properties. 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 properties is to hold it for long-term rental yields or for capital appreciation. In addition, properties that are held for a longer period and that have several possible purposes of use, are classified as investment property. Properties where development by the Group is ongoing for future use as business premises that will be leased out under operating leases and commercial buildings which have been acquired and are undergoing major renovation work are also classified as investment property. 21

22 Consolidation The consolidated financial statements present the financial information of EfTEN Kinnisvarafond AS, its subsidiaries and the joint ventures, consolidated on a line-by-line basis. The subsidiaries and joint ventures are consolidated from the date on which control or joint control is transferred to the Group, and subsidiaries and joint ventures are deconsolidated from the date that control or joint control ceases. Subsidiaries are companies controlled by the parent company. Control is presumed to exist when the parent company owns, directly or indirectly through its subsidiaries, more than 50% of the voting power of the subsidiary or otherwise has power to govern the financial and operating policies 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 accounted for under the equity method. The subsidiaries use the same accounting policies in preparing their financial statements as the parent company. All inter-company transactions, receivables and payables and unrealised gains and losses from transactions between the Group companies have been fully eliminated in the financial statements. Unrealised losses are not eliminated if it constitutes asset impairment by substance. New subsidiaries (business combinations) are accounted for in the consolidated financial statements using the acquisition method. The cost of a business combination accounted for using the acquisition method is allocated to the fair value of assets, liabilities and contingent liabilities as at the date of acquisition. The difference between the cost of the acquisition and the fair value of acquired assets, liabilities and contingent liabilities is recognised as goodwill. If fair value exceeds cost, the difference (negative goodwill) is immediately recognised as income of the period. Investments in subsidiaries and joint ventures in the separate balance sheet of the parent company In the separate balance sheet of the parent company (presented in Note 23), the investments in subsidiaries and joint ventures are measured at fair value. Dividends paid by subsidiaries and joint ventures are recognised at the moment when the parent company obtains the right to these dividends. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable from transactions. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the group and the revenue can be measured reliably. Rental income from investment properties is recognised on a straight-line basis over the lease term. Income from intermediation of services (utility fees of subtenants, sublease, and other intermediated services) is offset against the expense on services purchased. Finance income Interest income is recognised on an accrual basis, using the effective interest rate method. Dividend income is recognised when the right to receive payment has been established. 22

23 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 are readily convertible into a known amount of cash for up to three months from the actual transaction date and which are subject to an insignificant risk of changes in market value. Such assets are cash, demand deposits and term deposits with a maturity of up to three months. Financial assets All financial assets are initially recognised at cost which is the fair value of the consideration paid for the financial asset. Acquisition costs are any costs that are directly attributable to the acquisition of the financial asset, including fees and commissions paid to agents and advisers, as well as any non-recoverable levies, taxes and duties. An exception is financial assets measured at fair value through profit or loss, the additional expenses related to the acquisition are recognised as an expense in the income statement. A regular way purchase or sale of financial assets is recognised using trade date accounting. A trade date is the date at which the Group commits itself to purchase or sell a certain financial asset. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established by regulation or convention in the marketplace concerned. Upon initial recognition, financial assets are classified in one of the following four categories of financial assets (see below). The following principles are used for measurement of financial assets in each category: Financial assets at fair value through profit or loss fair value; Held-to-maturity investments amortised cost; Loans and receivables amortised cost; Available-for-sale financial assets fair value or cost in case of equity instruments, the fair value of which cannot be reliably measured. In the years 2014 and 2013, the Group only had financial assets in the Loans and receivables category. Loans and receivables from other parties After initial recognition, loans and receivables are measured at amortised cost using the effective interest rate method. Amortised cost is calculated for the whole term of useful life of the financial asset, including any discount or premium arising upon acquisition and any directly attributable transaction costs. If there is objective evidence, which indicates that an impairment loss on a financial asset carried at amortised cost has been incurred, the carrying amount of the financial asset is written down by the difference between the book value and the recoverable amount. The recoverable amount is the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Financial assets that are individually significant are assessed for impairment on an individual basis. If 180 days or more has passed from the due date of the receivable, the amount receivable is classified as a doubtful receivable and written off as an expense to the extent of 100%. If a decrease in the value of assets becomes evident more quickly, the receivables are written down earlier. If a receivable that has been written down is collected or any other event occurs which reverses an impairment loss that has been recognised, the reversal is recognised by reducing the line item in the income statement within which the impairment loss was originally recognised. Interest income from receivables is recognised in the income statement on the line Finance income. 23