Management Board s Report of Activities of Dom Development S.A. in 2017 MANAGEMENT BOARD S REPORT OF ACTIVITIES OF DOM DEVELOPMENT S.A.

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1 MANAGEMENT BOARD S REPORT OF ACTIVITIES OF DOM DEVELOPMENT S.A. IN 2017 Warsaw, 06 March 2018

2 CONTENTS APPROVAL BY THE MANAGEMENT BOARD OF THE MANAGEMENT BOARD S REPORT OF ACTIVITIES OF DOM DEVELOPMENT S.A. IN INTRODUCTION GENERAL INFORMATION ABOUT DOM DEVELOPMENT S.A Group s Structure Activities of the Company and the Group Information on core products Information on the markets, customers and sources of supply of production materials sales structure Major contractors OPERATIONS OF DOM DEVELOPMENT S.A Operations of Development projects commenced and completed Current and future development projects Agreements significant for the business activity of the Company Agreements with shareholders Cooperation agreements Transactions with related entities Litigations Development of, risk factors Significant risk factors and factors important for development of the Company Perspectives for the development of the Company s business activities FINANCIAL SITUATION OF THE COMPANY, FINANCE MANAGEMENT Basic economic and financial figures disclosed in the annual financial statements of the Company for Selected data from the balance sheet Selected data from the income statement Selected information from the cash flow statement Forecasts Finance management in the Company Profitability ratios Liquidity ratios Leverage ratios Information on loans, bonds, borrowings, sureties and guarantees Borrowings contracted or terminated Loans contracted or terminated Bonds Borrowings provided Sureties provided and received Guarantees provided and received Use of proceeds from the issue of securities Assessment of the possibility to implement investment projects Evaluation of factors and non-typical events affecting the result for the financial year

3 4. STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE Share capital, shareholders Shareholders Special control rights Limitation of right in shares The General Shareholders Meeting Principles for the amendment of the articles of association The Management Board Principles for the appointment or dismissal of the Management Board Composition of the Management Board Principles governing the functioning of the Management Board The Supervisory Board Principles for the appointment or dismissal of the Supervisory Board Composition of the Supervisory Board Principles governing the functioning of the Supervisory Board The Supervisory Board Committees Remuneration policy report Remuneration system at the Company Non-financial components of remuneration for the Members of the Management Board and key managers Assessment of the Remuneration Policy operation Terms and amounts of remuneration, bonuses and benefits received by individual members of the Management Board The amount of remuneration, bonuses and benefits received by individual members of the Supervisory Board Agreements with the members of the Management Board in the event of their resignation or dismissal Application of the Diversity Policy in relation to the Management Board and the Supervisory Board Shares held by the members of the Management Board and the Supervisory Board Policy for sponsoring, charity and other activities of a similar nature Management Option Programmes Existing employee share schemes Employee share scheme control system Changes in the basic management principles of the Company Internal control and risk management systems Auditor

4 APPROVAL BY THE MANAGEMENT BOARD OF THE MANAGEMENT BOARD S REPORT OF ACTIVITIES OF DOM DEVELOPMENT S.A. IN 2017 This Management Board s report of activities of was prepared and approved by the Management Board of the Company on 6 March Jarosław Szanajca, President of the Management Board Janusz Zalewski, Vice President of the Management Board Małgorzata Kolarska, Vice President of the Management Board Terry R. Roydon, Member of the Management Board. 3

5 INTRODUCTION The joint stock company (the Company ) is the parent company of Capital Group (the Group ). The Company has been entered into the National Court Register under number maintained by the District Court for the capital city of Warsaw, 12th Commercial Division of the National Court Register. The registered office of the Company is in Warsaw ( Warsaw, pl. Piłsudskiego 3). Dom Development was established in 1995 by a group of international investors, and Polish management staff joined it in November Participation of the international investors guaranteed implementation of Western European experience and standards as regards housing developments in the market where the Company operates. As at 31 December 2017 the Company was controlled by Dom Development B.V. with registered office in the Netherlands which held 57.34% of the Company s shares. 1. GENERAL INFORMATION ABOUT DOM DEVELOPMENT S.A Group s Structure The Group s structure and the Company's interest in the share capital of the entities comprising the Group as at 31 December 2017 is presented in the table below. Entity Country of registration % of the share capital held by the parent company % of the votes held by the parent company Consolidation method Subsidiaries Dom Development Grunty sp. z o.o. Poland 46% 100% full consolidation Dom Development Kredyty sp. z o.o. Poland 100% 100% full consolidation Dom Development Morskie Oko sp. z o.o. under liquidation Poland 100% 100% full consolidation Dom Development Wrocław sp. z o.o. Poland 100% 100% full consolidation Dom Land sp. z o.o. Poland - - full consolidation Euro Styl S.A.* Poland 100% 100% full consolidation Euro Styl Development sp. z o.o.* Poland 100% 100% full consolidation Mirabelle Investments sp. z o.o. Poland 100% 100% full consolidation The Group has been also engaged in the joint venture: Fort Mokotów sp. z o.o. under liquidation Poland 49% 49% equity method * Euro Styl S.A. is the parent company of the Euro Styl S.A. Capital Group, with non-controlling interests held by Euro Styl Development sp. z o.o. As a result of the acquisition of both these companies, has full control over the Euro Styl S.A. Capital Group Activities of the Company and the Group The main area of activity of the Company and the subsidiaries operating within the Group is the construction and sale of residential real estate. The Company has been operating, directly or through its subsidiaries, in the three markets of Poland. These are: Warsaw and Tricity with their surroundings, and Wrocław. The development projects of the Group in Warsaw are carried out directly by The development projects of the Group in Wrocław are carried out by a subsidiary, namely Dom Development Wrocław Sp. z o.o. 4

6 The construction-related part of development projects in both these markets is predominantly run under a general contracting system with the execution contracted to professional third-party building companies. The Group operated in the Tricity market through Euro Styl S.A. Capital Group that was acquired ( Euro Styl Group ). The projects of the Euro Styl Group (the construction-related part) are run by Euro Styl Construction Sp. z o.o., an SPV operating within the Euro Styl Group which is involved in the management of construction activities by hiring specialised subcontractors for individual types of building works. In the twelve-month period ended 31 December 2017: The Company and the Group did not discontinue any of its activities. Acquisition of Euro Styl S.A. Capital Group On 8 June 2017, the Company acquired 100% of the shares in Euro Styl S.A. with its registered office in Gdańsk and 100% of the shares in the share capital of Euro Styl Development sp. z o.o. with its registered office in Gdańsk for the aggregate amount of PLN 260 million (the Transaction ). As a result of the Transaction, controls the Euro Styl S.A. Capital Group, which is a residential developer in the market of Tricity and its vicinity. Fort Mokotów Inwestycje sp. z o.o, under liquidation, was wound up on 19 May As a result the perpetual usufruct right to the land and cash of FMI have been transferred to the Company. This liquidation did not have any significant impact on the operations of the Company and the Group. Acquisition of Mirabelle Investments Sp. z o.o. On 7 September 2017, the Company acquired 100% shares in the share capital of Mirabelle Investments sp. z o.o. with its registered office in Warsaw, for a total amount of PLN 58 thousand. Mirabelle Investments sp. z o.o. is an addressee of administrative decisions and the contracts that are necessary to develop a housing project with approx units on the real properties in the Żoliborz district in Warsaw. The right of perpetual usufruct to these properties was acquired by the Company on 7 September It is not the Company's intention to carry out operations through Mirabelle Investments sp. z o.o. Establishment of Dom Development Kredyty so. z o.o. On 6 October 2017 Dom Development Kredyty sp. z o.o. (a limited liability company) was established, with 100% of shares held by The share capital of this company is PLN 500 thousand and has been paid cash. The scope of operations as defined in the articles of association of this newly established company is to provide credit intermediation services to financial institutions. Acquisition of K&L sp. z o.o. Futura Park Sp.k. and K&L sp. z o.o. Kwartet Polanki Sp.k. by the Euro Styl S.A. Capital Group On 26 October 2017, Euro Styl S.A. Capital Group acquired K&L sp. z o.o. Futura Park Sp.k. and K&L sp. z o.o. Quartet Polanki Sp.k. For the total price of PLN thousand. The entire price was paid in cash. The acquired companies operate as a developer in the housing segment in the Tricity market and in the surrounding areas. The purpose of this acquisition was for Euro Styl S.A Capital Group to enter to two major locations in the Tricity market and increase total revenue and profit of the Group. Due to the nature of the transaction, the purchase as described below was considered as purchase of assets rather than purchase of an enterprise. The Group did not make any other material capital investments within the framework of the Capital Group. All free cash was invested by the companies operating within the Group in short-term bank deposits Information on core products The main aim of the Company has always been the construction of affordable flats in the so-called popular segment (mid market). The Company s offer is supplemented with other market segment products. Currently, product assortment of the Company comprises multi-family buildings (flats and apartments), which can be divided into the following market segments: Popular flats (mid-market) flats in residential buildings and housing estates are usually located outside of the immediate city centre, normally with at least 200 flats. 5

7 Apartments (high-end) apartments in residential buildings or small groups of buildings located in prestigious city centre locations and in popular residential districts, e.g. Żoliborz, Mokotów, Ochota in Warsaw, Oliwa in Gdańsk, Dolny Sopot in Sopot, Orłowo in Gdynia and Biskupin in Wrocław. Flats and apartments are offered in two standards: turn-key and unfinished. The unfinished flats/apartments are finished by buyers on their own account. Various finishing options are available for turn-key flats/apartments. Commercial space mainly shops constructed by the Company as part of residential buildings. The revenues from the sale of such space account for an insignificant part of the total revenue but they enable the possibility to offer such facilities as shops, which increases the attractiveness of a given project. In addition to this, the Company s tasks include the management of housing estates constructed under development projects conducted by the Company. Management will be performed only through a limited period of time, i.e. until the final management company is chosen by the common hold associations which take over the managerial duties from the Company. In 2017, the Company s revenue from the sale of products and services related to real estate management were as follows: REVENUE STRUCTURE in thousand PLN in thousand PLN Change 2017/2016 Revenue from the sale of flats/apartments, houses and commercial space % Revenue from the sale of real estate management services % Revenue from other sales (53%) Total % 1.4. Information on the markets, customers and sources of supply of production materials In 2017 the activity of the Company was mainly concentrated in Warsaw. The portfolio of offered apartment products and projects that were being prepared, was predominantly made up of investments in the popular segment, likewise in This has already been reflected in both, the sales structure and the structure of planned investment projects. In 2017, the Group also operated in the Wrocław market through its subsidiary, namely Dom Development Wrocław Sp. z o.o. In 2017, the operations of the Group in the said market focused on expanding the strategic potential through acquisitions of land for future residential developments. Since mid 2017 the Group has also been operating in the Tricity market, which it entered by acquiring Euro Styl S.A. Group. As a result of the acquisition the Group has a 10% share in the Tricity market, holding a leading position as a residential developer sales structure NUMBER OF PRODUCTS SOLD BY PRODUCT GROUPS Change Popular (mid-market) units % High-end apartments and retail units (including luxury apartments) % Total % The Company does not depend on any of its customers because the sales are dispersed amongst a large, varied and changing group of buyers of residential and commercial units. The majority of the Company s customers are natural persons. The sales in the table above covers signed preliminary agreements (including withdrawals) that are the measure for current scale of the Company s operations. 6

8 1.4.2 Major contractors The main costs incurred by the Company in the real estate development activity are the costs of construction services provided by third parties, not related to the Company, under a general contracting system and the purchase costs of land for the investment projects. As regards the land, despite individual transactions of significant value, the Company does not depend on one supplier. As regards the construction services, contractors are chosen in internally organised tender procedures. The Company uses the services of various construction companies operating in the Warsaw market. The Company s major contractors, in terms of the value of services purchased in this period, were: CONTRACTOR in thousand PLN UNIBEP S.A FUNDAMENTAL GROUP S.A NDI S.A PPHU RODEX SP.Z O.O WARBUD S.A KALTER SP.ZOO REMBUD Sp. z o.o ERBUD S.A The turnover shown above accounts for approximately 46% of the sum spent by the Company on construction and design services. 7

9 2. OPERATIONS OF DOM DEVELOPMENT S.A Operations of In 2017 the Company continued its development activities, being the construction and sale of residential real estates. The construction works were conducted predominantly in the general contractor system, and the works were contracted to specialized third-party building companies. There are over twenty development projects that are simultaneously conducted by the Company. The Management Board of the Company regularly reviews and gives its opinion on: current projects during their implementation in relation to both, the progress of construction works, and current and anticipated sales revenue, the best possible manner in which the plots of land from the land-bank may be used and adjustment of the product offer to best meet the expectations and demand in the market, the potential plots of land which may be purchased for further development projects to be carried out in the following years, also in major Polish cities other than Warsaw, optimization of financing of the Company s operating activities Development projects commenced and completed In 2017, the following material changes in the portfolio of the Company s real estate development investments under construction took place: Projects where the construction commenced in the period from 1 January 2017 until 31 December 2017: Project Standard Number of apartments Number of commercial units Started in Wilno VI, phase 1 Popular Q Forma, phase 1 Popular 89 6 Q Premium 5, phase 3 Popular Q Cybernetyki 17, phase 1 Popular Q Cybernetyki 17, phase 2 Popular Q Moderna, phase 3 Popular Q Premium 4, stage 2 phase 2 Popular Q Wille Lazurowa, phase 2 Popular Q Forma, stage 2 phase 1 Popular Q Amsterdam, phase 2 Popular Q Wilno VI, phase 2 Popular Q Osiedle Port Żerań, phase 1 Popular Q Apartamenty Mokotów nad Skarpą 2 Apartments Q Apartamenty Park Szczęśliwicki Apartments 46 0 Q Dom na Bartyckiej Popular Q Forma, stage 2 phase 2 Popular Q Regaty, phase 1 Popular 69 3 Q Total

10 Projects where the construction was completed in the period from 1 January 2017 until 31 December 2017: Project Standard Number of apartments Number of commercial units Completed in Premium 1, stage 1 phase 1 Popular Q Moderna, phase 1 Popular Q Osiedle Przyjaciół, phase 3 Popular 93 2 Q Apartamenty Mokotów nad Skarpą Popular Q Palladium, phase 1 Popular Q Premium 2, stage 1 phase 2 Popular Q Osiedle pod Różami, phase 3 Popular 47 3 Q Ursynovia (Anody), phase 1 Popular 72 7 Q Ursynovia (Anody), phase 2 Popular Q Saska III Popular Q Żoliborz Artystyczny, phase 5 Popular Q Żoliborz Artystyczny, phase 6 Popular Q Żoliborz Artystyczny, phase 7 Popular Q Moderna, phase 2 Popular Q Wilno III, phase 2 Popular Q Wilno III, phase 3 Popular Q Wille Taneczna Popular Q Total Current and future development projects As at 31 December 2017, there are 22 projects under development at the Company with units to be built (apartments and retail units) in total. The new development projects with the potential of units in total are defined and planned by the Company Agreements significant for the business activity of the Company Major contractors with agreements to a total value exceeding 10% of the shareholders' equity of the Company that were concluded in the financial year In the financial year 2017 the Company concluded agreements with a total value exceeding 10% of shareholders equity of the Company with the following entities: Fundamental Group S.A. (formerly Budner S.A.) - agreements with a total value of PLN thousand, Unibep S.A. - agreements with a total value of PLN thousand, Erbud S.A. - agreements with a total value of PLN thousand. All the agreements were general contractor agreements for the Company's projects. Other major agreements On 8 June 2017, the Company entered into sales agreements with Forum IV Fundusz Inwestycyjny Zamknięty (closedend investment fund) with its registered office in Cracow under which the Company acquired 100% of the shares in Euro Styl S.A. with its registered office in Gdańsk and 100% of the shares in the share capital of Euro Styl Development sp. z o.o. with its registered office in Gdańsk for the aggregate amount of PLN thousand. As a result of the said transaction, controls the Euro Styl S.A. Capital Group that is a residential developer in the market of Tricity and its vicinity. As at the date of the aforementioned transaction Euro Styl S.A. Group cash and cash equivalents amounted to PLN 81.4 million, and the interest bearing liabilities were PLN 2.1 million. The acquisition of Euro Styl S.A. Group resulted in an incremental increase in the Group's business activities and expanded its operating territory to include the Tricity area. 9

11 On 7 September 2017 a purchase agreement and transfer agreement concerning perpetual usufruct of real properties located in the Żoliborz District, Warsaw, where the Company intends to develop a multi-phase real estate project with units, were entered into by the Company and Acciona Nieruchomości Żoliborz sp. z o.o. Moreover, on 7 September 2017 the Company acquired 100% of the shares in the share capital of Mirabelle Investments sp. z o.o. with its registered office in Warsaw and the copyrights to the project, which may be developed on the aforementioned real properties. Mirabelle Investments Sp. z o.o. is the addressee of administrative decisions and the party to the agreements required for the development of housing project on the above mentioned properties. It is not the Company's intention to carry out operations through Mirabelle Investments sp. z o.o. Total fees paid by the Company as a result of the aforementioned transactions were PLN thousand Agreements with shareholders has no information on any possible agreements between the shareholders concluded Cooperation agreements In 2017, did not conclude any significant cooperation agreements with other entities Transactions with related entities All transactions made by the Company or its subsidiaries with related entities are based on the arm s length principle. Transactions with the related entities are presented in note 7.43 to the financial statements for the period ended 31 December Litigations Proceedings before the courts, arbitration or public administration authority As of 31 December 2017 there was no individual proceeding before any court, authority competent for arbitration or public administration body, concerning the liabilities or receivables of the Company or its subsidiaries, the value of which would be at least 10% of the Company s shareholders equity. As of 31 December 2017 there were not two or more proceedings before any court, authority competent for arbitration or public administration body, concerning the liabilities or receivables, the value of which would be at least 10% of the Company s shareholders equity. As of 31 December 2017, the Company was a party to proceedings concerning liabilities and receivables, the total value of which was approx. PLN thousand, including the total value of proceedings concerning liabilities at approx. PLN thousand and the total value of proceedings concerning receivables at approx. PLN thousand. The proceedings involving the Company have no significant impact on the Company s activity. 10

12 2.2. Development of, risk factors Significant risk factors and factors important for development of the Company Significant risk factors and threats to the business activity conducted by the Company have been presented below. Macroeconomic factors The Company s business activities are significantly affected by global developments, and in particular by their impact on the Polish economy. The most important macroeconomic factors for the Company s financial condition and results include: economic growth rate (risk of growth deceleration), unemployment rate (risk of growing unemployment), position of financial institutions (risk of a deterioration of the financial standing of these institutions). The business activities of the Company are affected by the following macroeconomic factors, which have an impact on the state of the Polish economy: GDP, level of investments, household income, interest rates, inflation, unemployment, the condition of the real estate development and construction industries, and the real estate market. In 2017, the macroeconomic environment had a positive effect on the Company's activities. The key positive factors for the housing market were the continuing record-low interest rates and the very good situation in the labour market. In Warsaw, Wrocław and Tricity, the unemployment rate was around the natural rate, while salaries were gradually increasing. The Management Board expects that these favourable conditions will continue in the year Availability of mortgages In 2017, access to mortgages was relatively high. The interest rates on a mortgage were stable in the past year, at values around the historic minimum. Growth in salaries and low inflation had a positive impact on the disposable income of households, thus increasing creditworthiness. The increase in the required minimum deposit up to 20% did not significantly affect the credit market. It is still possible to obtain a loan with a loan to value ratio of 90%, but this requires down payment insurance to be obtained, which increases the cost of the mortgage. The volume of new bank loans picked up as compared to 2016, although the majority of real estate purchases were still made by cash. At, cash transactions accounted for approximately 40% of sales in the previous year. Foreign exchange risk As Recommendation S issued by the Polish Financial Supervision Authority came in effect early in January 2014, foreign exchange loans are to be provided only when majority of income is earned in a specific currency. This is to prevent speculations and reduce foreign exchange risk. The historic foreign currency loans that were taken at lower exchange rates than they are at the present due to PLN depreciation against EUR or CHF, often exceed the real value of the properties bought that constitute security for mortgages. Nevertheless, the drop in the Swiss franc exchange rate from PLN 4.41 at the beginning of January 2017 to PLN 3.56 at the end of December had a significant positive impact on the situation of borrowers with loans denominated in this currency. Concentration of operations in the Warsaw market The Company s present activity is concentrated in the Warsaw market. This makes the Company s results highly dependent on the situation in this market. However, the Management Board of the Company is of the opinion that in the long-term this will be the most dynamic residential real estate market in Poland, and the Company already has a wellestablished position and therefore the possibility of further development. 11

13 In 2017, the Company made significant changes in its Group structure. They were intended to intensively expand the Group's activities in the Tricity and Wrocław markets. It should be expected that in the upcoming years these markets will increase their respective share in the Group's operating activities and financial results. Activities outside Warsaw are conducted through the Company's subsidiaries, i.e. the Euro Styl S.A. Group operating in the Tricity market and Dom Development Wrocław Sp. z o.o. Opportunity to purchase land for new projects The future success of the Company is founded on the ability to continually and effectively acquire attractive land for new development projects at the right times and competitive prices. This will allow the generation of satisfactory project contributions. A limited supply of land in prime locations where the legal status is not a hindrance means that the ability to acquire new land is a significant source of competitive advantage in the real estate development market. The housing market upturn resulted in an increased demand for land, therefore in order to maintain the volume and quality of the offer, developers must regularly replenish their land banks. Land prices went up driven by fierce competition for investment properties. The Management Board places great emphasis on acquiring affordable land for new investments so that the Company has a broad and varied real estate reserves that secure its activity for at least the next two years. The Company's success in securing the land bank for the purpose of new projects is predominantly due to the experience of the Company's personnel and significant cash resources that allow for the quick closing of even the largest transactions. Administrative decisions The nature of real estate development projects requires a number of licenses, approvals and arrangements to be obtained by the Company at every stage of the development process. Despite significant caution applied in the project execution schedules there is always a risk of delay in their obtainment, challenges of decisions which have already been issued (also due to appeals with no consequences for appellants) or even failing to obtain them. All these affect the ability to conduct and complete the executed and planned projects. The fundamental activity adopted by the Company so as to reduce the exposure to market risks is proper assessment of potential and control of current development projects based on investment models and decision-making procedures developed in the Company. The adherence to such procedures is closely monitored by the Management Board of the Company. The activities of the Company are also affected by administrative decisions at a central level such as the conditions for subsidies under the Homes for the Young programme, the decision to terminate this programme or restrictions on land transactions. Potential future changes in the legislation also constitute a risk that could directly or indirectly affect the Company's activities and results. In particular these type of risks include the possibility of introducing a mandatory close-end escrow account as a form of security for buyers of apartments. The Management Board assesses, however, that the possible introduction of such an obligation may have a negative impact on the Company's activities to a lesser extent than on other market operators, primarily due to our comfortable financial situation and also because of the trust and good reputation, which enjoys among financial institutions. There has been a formalised risk management procedure in operation within the Company since Under this procedure the risk is managed through the identification and assessment of the risk areas for all aspects of the activities, in which the Company and the Group are involved, together with defining activities required to reduce or eliminate such risks (including through the procedures and internal audit system) The risk management procedure is subject to periodic revision and is updated by the Management Board jointly with the key management staff and third party advisers. 12

14 2.2.2 Perspectives for the development of the Company s business activities The year 2017 was another historically good for both, the Company and the entire real estate development sector. According to the Management Board the year 2018 will also see a very strong demand. The threat to the transaction volume in the market could be insufficient supply; already in Q the offer of new residential units has decreased. Lower supply and the current level of demand will accelerate price growth as it was the case in foreign markets. If this happens, the Company could only benefit from this situation owing to its broad land bank and very good financial condition. The Company intends to continue its activities in the current scope. In order to ensure a proper offer structure, the Company will continue to develop its land bank and balance the proportions between land owned on the left and right bank of the Vistula river in Warsaw and continue to search for attractive land in Tricity and Wrocław. In view of the favourable property market conditions the object of the Company s Management Board is to adapt the Company and the Group to a new scale of operations. The major steps undertaken in this respect included: ensuring that adequate sources of finance are available to the Company, both for current and future real estate development projects, with due care from the perspective of the Company and its customers, co-operation with banks, and strong assistance to customers in obtaining mortgages for purchase of an apartment, adjusting the sales offer to the market demand, aligning land purchase outlays to Company s existing and future needs, optimizing the way and time the current land bank is used, increasing the efficiency and scale of sales support activities, maintaining and building upon customer confidence in the Dom Development brand, restructuring the organization and employment to the anticipated level of operational activities, optimising general administrative expenses. The above-mentioned measures taken by the Management Board will be continued in In addition to this, in the next twelve months will focus, in particular, on the further maximisation of the margin, expecting possible drop in sales volume. This will be possible due to: the well-established position in the Warsaw residential property market, the high qualifications and potential of the Company s management, the worked out know-how in respect of operational execution of development projects, many years of experience in selling and financing development projects, the land bank (for both, ongoing and future projects). very good liquidity of the Company. In the upcoming twelve-month period it is also planned to: further focus on the operating activities in the popular flat segment and maintain activities in the remaining product groups within the offered product range, develop operations of the Group outside the Warsaw market through the expansion of operations in Tricity and Wrocław. 13

15 3. FINANCIAL SITUATION OF THE COMPANY, FINANCE MANAGEMENT 3.1. Basic economic and financial figures disclosed in the annual financial statements of the Company for Selected data from the balance sheet Assets Structure of the Company s assets as at 31 December 2017, and changes as compared to the figures as at the end of ASSETS in thousand PLN Share in assets in thousand PLN Change 2017/2016 Total fixed assets % % Current assets Inventory % % Trade and other receivables % % Other current assets <1% % Cash and cash equivalents and Short-term financial assets % (48)% Total current assets % % Total assets % % Equity and liabilities Structure of the Company s shareholders equity and liabilities as at 31 December 2017, and changes as compared to the figures as at the end of EQUITY AND LIABILITIES in thousand PLN Share in equity and liabilities in thousand PLN Change 2017/2016 Shareholders' equity Share capital % <1% Share premium less treasury shares % % Reserve and supplementary capitals, and accumulated unappropriated profit (loss) % % Total shareholders' equity % % Liabilities Total long-term liabilities % % Total short-term liabilities % % Total liabilities % % Total equity and liabilities % % 14

16 3.1.2 Selected data from the income statement Income statement of the Company for the year ended 31 December 2017 as compared to in thousand PLN % of sale in thousand PLN Change 2017/2016 Sales revenue % % Cost of sales % % Gross profit on sales % % Operating profit % % Profit before tax % % Net profit % % Basic earnings per share (in PLN) % Selected information from the cash flow statement (in thousand PLN) Change Cash and cash equivalents opening balance % Net cash flow from operating activities (43)% Net cash flow from investing activities ( ) ( ) na. Net cash flows from financing activities ( ) (66 591) na. Cash and cash equivalents closing balance (51)% The year 2017 opened with a cash and cash equivalents balance of PLN thousand and closed with a balance of PLN thousand. Therefore, in the period from 1 January until 31 December 2017 the balance of cash dropped by PLN thousand. In 2017, the Company recorded a net inflow of cash from the operating activities in the amount of PLN thousand. The key factor here was the increase in profit before tax by 47% from PLN thousand to PLN thousand. The increase in profit before tax resulted mainly from the increase in gross margin on sales, which was 28%, that is 5 percentage points higher than in The lower net cash flows from operating activities by PLN thousand (i.e. by 43%) in comparison to the previous year resulted primarily from the effect of the recognition in 2016 of the acquisition of shares in Fort Mokotów Inwestycje Sp. z o.o. (at the carrying amount of net investment of PLN thousand) as cash outflows from investment activities rather than from operating activities. The purpose of the transaction was the acquisition by the Company of the perpetual usufruct to land in the Mokotów district of Warsaw, which after the winding up of Fort Mokotów Inwestycje Sp. z o.o. were classified as inventory in the balance sheet of the Company. The lower than in the previous year net cash inflows from operating activities is also the outcome of the considerable purchases of land by the Company. In 2017, the Company recognised net cash outflows from investment activities in the amount of PLN thousand. This is mainly due to the acquisition of Euro Styl S.A. Capital Group, at the carrying amount of net investment of PLN thousand and the reimbursable contributions to the equity of subsidiaries as made by the Company in the amount of PLN thousand. In 2017, the Company recorded a net cash outflow from the financing activities in the amount of PLN thousand. The excess of financial outflow over the inflow is mainly due to the payment of dividends by the Company in the amount of PLN thousand Forecasts Both, Capital Group and the parent company did not publish financial forecasts for

17 3.3. Finance management in the Company In 2017, the finance management of in respect of construction of residential buildings was focused on seeking and structuring sources of external financing for the projects under construction and on maintaining a safe level of liquidity. The Management Board analyses the current and plans the future optimum financing structure on a regular basis in order to achieve planned ratios and financial results, and at the same time, to ensure liquidity and the comprehensive financial security of the Company. In 2017, the activities of the Company generated a positive result at each level of the income statement, thus reinforcing financial condition of the Company. The Management Board is of the opinion that the net assets and financial results of at the end of 2017 demonstrate the strong and stable financial position of the Company. This results from the well-established position of the Company in the housing market, appropriate operational experience and potential in place, both in terms of execution of residential development projects, and the sale and financing of these projects. The net assets and financial standing of the Company has been demonstrated by liquidity and debt ratios presented further in this report. Having considered the situation in the Polish real estate market in recent years, the financial results achieved by the Company can be considered very good. In 2017, the Company delivered units (including apartments and retail units) to its customers as compared to units in The financial result for 2017 is significantly higher (by 46%) than the result recorded in At the same time, the Company had a record net sales volume of units which is 20% more than in 2016, and this may be considered as being a very strong result Profitability ratios The ratios showing profitability of the business activity pursued by the Company have improved as compared to the previous year. It predominantly results from the fact that the average margin generated on apartments delivered in 2017 was higher than on apartments delivered in The return on assets and equity has also improved, this is a result of a net profit growth of 46% with a much lower growth in assets and equity (up by 9% and 7% respectively). PROFITABILITY RATIOS Operating profit margin EBITDA / net sales revenue Net profit margin Net profit / net sales revenue Return on assets (ROA) Net profit / total assets Return on equity (ROE) Net profit / shareholders equity 18.3% 14.1% 14.3% 11.0% 8.6% 6.5% 18.6% 13.7% Liquidity ratios Having considered the specifics of the real estate development industry with its long production cycle and tighter funding requirements for the companies operating in this sector, the Company has been in a comfortable financial position. This is due to a number of long-term decisions and actions taken by the Company s Management Board. These high ratios to a high extent result from the relevant financing structure applied, that is predominantly medium-term and longterm, as opposed to short-term and medium-term financing. The liquidity ratios are driven by decisions around financing of current investments (including decisions when to commence the construction of individual estates and concerning the product mix offered for sale) and the strategy of acquiring new land. The Management Board considers the Company's liquidity to be very good. The current ratio was almost identical to the year before, with the value considered to be very safe. The quick ratio notably decreased from 1.20 at the end of 2016 to 0.69 as at 31 December This ratio should be analysed when taking into account the specifics of real estate development activities. In 2017, the Company's inventory increased by more than 15%. The share of inventory in the current assets, with a relatively stable revalue, increased from 75% at the end of 2016 to 86% at the end of This 16

18 change resulted mainly from the liquidation of Fort Mokotów Inwestycje Sp. z o.o. and the reclassification of the cost of acquisition of that company from fixed assets to inventory and from the increase in the scale of operations and the recognition of apartments and retail units for which sale agreements have been signed as inventory until the date of handover of units to the buyers. The increase in the value of inventory is therefore a natural consequence of the increase in the scale of the Company's operations and does not constitute a threat to its liquidity. Also the cash ratio decreased significantly as compared to the situation at the end of 2016, while still remaining at a very high level. The main reason for the decrease of this ratio from 1.11 to 0.53 is drop in cash and cash equivalents by 51%, resulting primarily from the acquisition of Euro Styl S.A. Capital Group by the Company for PLN 260 million out of its own funds, the considerable expenditures on land and PLN 126 million appropriated for a dividend. This was also the result of the policy implemented by the Company's Management Board, namely a deliberate reduction of cash reserves while maintaining the availability of overdraft; as at 31 December 2017, the undrawn and available lines of credit was PLN 150 million. The Management Board is of the opinion that the credibility of the Company in the financial market is high which is reflected by relatively low cost of finance and diversified financing structure and by good relationships with banks and other financial institutions in the form of them providing the Company with loans and other forms of long-term finance (bonds). LIQUIDITY RATIOS Current ratio current assets / short-term liabilities less deferred income Quick ratio current assets less inventory / short-term liabilities less deferred income Cash ratio cash and cash equivalents, and bank deposits with a maturity of over 3 months / short-term liabilities less deferred income Leverage ratios Appropriate operating policy (i.e. proper commencement and pace of projects as well as controlled purchases of land) and conservative financing policy (the financing structure) maintained leverage ratios at adequate levels to support the business activity and maintain the Company s creditworthiness. The debt ratios with values similar at the end of 2017 to those at the end of 2016 reflect the conservative approach of the Company s governing bodies to the sources of finance for operations. The Company observed the largest difference in net interest bearing debt as compared to 2016, which increased from a negative value to a still very safe level of 13.4% as a result of the increase in the escrow accounts balance classified as short-term financial assets. LEVERAGE RATIOS Equity ratio shareholders equity / total assets Liabilities to equity ratio total liabilities / shareholders equity Liabilities to assets ratio total liabilities / total assets Interest bearing debt to equity ratio interest bearing liabilities (including accrued interest) / shareholders equity Net interest bearing debt to equity ratio interest bearing liabilities (including accrued interest) less cash and cash equivalents, and bank deposits with a maturity of over 3 month / shareholders equity 46.3% 47.1% 115.8% 112.5% 53.7% 52.9% 36.2% 41.2% 13.4% (5.5)% 17

19 3.4. Information on loans, bonds, borrowings, sureties and guarantees Borrowings contracted or terminated As at 31 December 2017 and 31 December 2016 the Company did not have any borrowings. The Company did not take or repay any borrowings and Loans contracted or terminated On 31 March 2017, an agreement for a revolving loan of up to PLN 85 million in the credit facility account was entered into with mbank S.A. Pursuant to the agreement with the bank, Dom Development Wrocław Sp. z o.o. may use up to PLN 35 million of this credit limit. This interest rate for this loan is set at WIBOR 6M plus margin, and the repayment date is on 1 March Details of the loans contracted by the Company have been presented in note 7.20 to the financial statements of the Company for Loan agreements terminated The Company did not terminate any loan facility agreement Bonds On 2 February 2017, the Company redeemed matured unsecured bonds with the nominal value of PLN each and the aggregate nominal value of PLN thousand, that were issued on 2 February On 17 November 2017, an agreement was signed with Trigon Dom Maklerski S.A., with its registered office in Cracow and with Trigon Investment Banking Spółka z ograniczoną odpowiedzialnością & Wspólnicy S.K., with its registered office in Warsaw concerning a Bond Issue Programme to be operated at Under this Programme Dom Development S.A. may issue, over the period of 10 years various, series of bonds with an aggregate value of no more than PLN thousand understood as the nominal value of all bonds issued and outstanding at any time during the term the Programme. On 15 December 2017, the Company issued unsecured bonds with the nominal value of PLN each and the aggregate nominal value of PLN thousand. The maturity date for these bonds is 15 December The issue value equals nominal value of the bonds. The interest rate is set at WIBOR 6M plus margin, and will be paid semiannually. No purpose for the bond issue was specified. The funds from the issue have been designated for current operations of the Company. Details of the bonds issued and redeemed by the Company have been presented in note 7.21 to the financial statements of the Company for Borrowings provided The Company did not provide any borrowings. On 22 December 2017, a loan dated 30 June 2010 granted by the Company to its subsidiary Dom Development Grunty Sp. z o.o. was fully repaid. This loan was fully repaid by way of payment of the balance in the amount of PLN 200 thousand Sureties provided and received In the year 2017, the Company granted a surety in the amount of PLN 365 thousand for PPU PALISANDER Sp. z o.o. for the performance of contractual obligations by NAILSEA Sp. z o.o. The Company did not receive any sureties. 18

20 3.4.6 Guarantees provided and received The Company did not provide any guarantees. The performance guarantees and retention bonds for defects and faults received are presented in the table below: Company Guarantee type Guarantee amount in thousand PLN UNIBEP S.A.* Bank guarantee FUNDAMENTAL GROUP S.A. Bank guarantee KALTER SP. Z O.O. Bank guarantee ERBUD S.A. Bank guarantee WARBUD S.A.** Bank guarantee F.B.I. TASBUD S.A. Bank guarantee REMBUD SP. Z O.O. Bank guarantee 933 TOTALBUD SP. Z O.O. Bank guarantee 825 MROZEK SP. Z O.O. Insurance guarantee 11 * The guarantee in the amount of PLN thousand had been issued on and expired on ** The guarantee in the amount of thousand PLN had been issued on and expired on Use of proceeds from the issue of securities The Company issued new bonds to the amount of PLN thousand on 15 November Information concerning the issue is presented in note of this report. The proceeds from the issue of bonds will be used for financing operations of the Company Assessment of the possibility to implement investment projects Assessment of the possibility to implement investment projects, including capital investment versus the resources held, with consideration of possible changes in the financing structure of investment activity is fully capable of financing the currently executed investment projects. The Company intends to finance the execution of real estate development projects from the shareholders equity, issue of commercial papers and bank loans. The Management Board attempts to adapt the maturity structure of the commercial papers issued and bank loans mainly to the duration of individual development projects, with particular consideration given to gradual replenishment of the land bank for future development projects. The Company's capacity to implement investment projects was confirmed. The Company s Management Board was able to simultaneously proceed with the acquisition of PLN 260 million worth Euro Styl S.A. Capital Group, significant land purchases, including PLN 185 million worth of plots in the Żoliborz district in Warsaw, and the distribution of dividends of PLN 126 million among shareholders while maintaining a high level of cash and low ratio of interest bearing debt to shareholders equity. has significant financial resources and has a very good opinion at banks and bondholders, which results in high availability of external funding. Currently, almost all activities of the Capital Group are conducted directly in Dom Development S.A. The Company's development projects planned for the upcoming year mostly focus on maintaining the scale of operations in Warsaw while developing the subsidiaries operating in the Tricity and Wrocław. An important step towards diversification of the Group's operations was the acquisition of Euro Styl S.A. Capital Group, and in turn Capital Group being ranked third in respect of sales in the Tricity market. The Company's Management Board expects that the experience of Euro Styl S.A. management in conjunction with the resources of Capital Group will ensure a stable leading position in the Tricity housing market. 19