Report of the Supervisory Board of Echo Investment S.A. on the results of:

Transcription

1 Report of the of Echo Investment S.A. on the results of: - assessment of the separate financial report of Echo Investment S.A. and the consolidated financial report of the Echo Investment Capital Group in 2017, - assessment of the Management Report of Echo Investment S.A. and of the Echo Investment Capital Group for 2017, - assessment of the position of Echo Investment S.A. and of the Echo Investment Capital Group in 2017, - review of the Management Board's requests concerning the allocation of net profit for 2017, - work of the of Echo Investment S.A. in 2017 REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

2 1. CONCLUSIONS FROM THE ASSESSMENT OF THE SEPARATE AND CONSOLIDATED FINANCIAL REPORTS, MANAGEMENT REPORTS OF THE COMPANY AND OF THE ECHO INVESTMENT CAPITAL GROUP FOR 2017, AND THE POSITION OF THE COMPANY AND OF THE ECHO INVESTMENT CAPITAL GROUP IN 2017 Acting pursuant to article 382 par. 3 of the Commercial Companies Code, the of Echo Investment S.A. assessed the following: a) separate financial report for 2017, comprising: - separate balance sheet as at 31 December 2017, with total assets, equity and liabilities amounting to PLN 3,679,549 thousand; - separate profit and loss account for the period from 1 January 2017 to 31 December 2017, with the revenue amounting to PLN 446,244 thousand, gross profit amounting to PLN 657,882 thousand and net profit amounting to PLN 632,496 thousand; - separate cash flow statement for the period from 1 January 2017 to 31 December 2017, showing a balance sheet increase in net cash of PLN 206,424 thousand; - separate statement of changes in equity for the period from 1 January 2017 to 31 December 2017, with an increase in equity amounting to PLN 426,150 thousand; - additional notes with regard to the compliance with the books, documents and the factual status; b) management report of Echo Investment S.A. for 2017; c) consolidated financial report for 2017, comprising: - consolidated balance sheet as of 31 December 2017, with total assets, equity and liabilities amounting to PLN 3,879,391 thousand; - consolidated profit and loss account for the period from 1 January 2017 to 31 December 2017, with revenue amounting to PLN 621,862 thousand, gross profit amounting to PLN 363,355 thousand and net profit amounting to PLN 312,164 thousand; - consolidated cash flow statement for the period from 1 January 2017 to 31 December 2017, showing a balance sheet increase in cash of PLN 39,975 thousand; - consolidated statement of changes in equity for the period from 1 January 2017 to 31 December 2017, with an increase in equity amounting to PLN 53,849 thousand; - additional notes with regard to the compliance with the books, documents and the factual status; d) management report of Echo Investment Capital Group for For auditing the separate and consolidated financial report, the Management Board of Echo Investment S.A. employed the auditing company Ernst & Young audit Polska Sp. z o.o. Sp. K. with its registered office in Warsaw, entered into the list of entities authorized to audit financial reports maintained by the National Chamber of Statutory Auditors under No. 130 (Statutory Auditor or Auditor). The has reviewed the auditors' opinions and reports on the separate and consolidated financial report. The states that the data included in the separate financial report of Echo Investment S.A. and the consolidated financial report of Echo Investment Capital Group correctly and reliably reflect the Group's material position and financial position. In addition, the financial report and the Management Board report contain all the information relevant for the assessment of business results, profitability and identification of all risks. The also confirms that the financial information contained in the reports of the Management Board of the parent company regarding operations of Echo Investment S.A. and the Echo Investment Capital Group is taken directly from the audited financial report and is consistent with it. These statements were based on the separate and consolidated financial report and the content of the opinion and report of the auditor. The auditor's opinion confirms that the financial report has been correctly prepared in all material respects, in accordance with the accounting policies of the International Financial Reporting Standards and related interpretations published in the form of European Commission regulations, and in the scope not governed by these Standards in accordance with the provisions of the Accounting Act of 29 September 1994 and the executive regulations issued on its basis and on the basis of properly maintained accounting books. In addition, the reports are in accordance with the provisions of the Company's statute. After analyzing the profit and loss account for the year 2017, the states that the profit in the Group decreased by 21% compared to 2016 and it amounted to PLN 312 mln. The profit from investment property item had a large share in the result. The high level of this item was the result of entering into books the first valuations of the fair values of real properties such as: Galeria Libero and the office buildings: Browary Warszawskie J, West Link, Sagittarius Business House as well as profit from the sale of O3 Business Park II, A4 Business Park III. In combination with a high gross profit on sales (a large number of apartments sold with final agreements) it enabled the Capital Group to generate an operating profit amounting to PLN mln. The financial result (financial income REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

3 financial costs) also had a positive impact on the consolidated profit, in which the most significant position is: valuation of EPP shares (PLN 112 mln) and dividends received from EPP (PLN 11 mln). The balance amounted to PLN 88.6 mln in 2017 and it increased by 121% compared to The analysis of the balance sheet reveals that value of the total assets increased by PLN mln for the Company and by PLN mln for Echo Investment Capital Group. The liabilities of Echo Investment Capital Group increased by 23% (the bond issue in Echo Investment S.A. and the issue of bonds related to the Griffin Premium RE contract). Analysis of the liquidity and debt ratios of Echo Investment Capital Group shows that there is ample liquidity. Keeping the debt and cash at the same level made it possible to keep the general debt ratio at a similar level. The Company showed an increase in its debt to equity ratio and an increase in the quick liquidity ratio. All indicators are at acceptable levels and reflect the Capital Group s good financial condition. DEBT AND LIQUIDITY RATIOS General debt ratio (general liabilities / general assets) 52% 49% Debt to equity ratio (general liabilities / equity) Current liquidity ratio (current assets / short-term liabilities) 127% 108% Quick liquidity ratio ((current assets stock) / short-term liabilities) In 2016 the Echo Investment Capital Group prepared a new strategic plan, called the profitable growth strategy. Accordingly, it will endeavor to revolve its capital more quickly and, consequently, generate higher growth rates. The company intends to share its profit with its shareholders in the form of regularly paid dividends. As of 31 December 2017 the Group had implemented the following projects: - retail projects: a) Galeria Libero in Katowice, b) Galeria Młociny in Warsaw, - office projects: c) West Link and Sagittarius Business House in Wrocław, d) O3 Business Campus (phase III) in Kraków, e) Browary Warszawskie J, Moje Miejsce I in Warsaw, - residential projects: a) Browary Warszawskie (stages A, B, C), Osiedle Reset I, Widoki Mokotów in Warsaw, b) Dom Pod Wilgą (phase II & III), Apartamenty GO in Kraków, c) Osiedle Perspektywa (phases I, II & III), Park Sowińskiego (phase IV), Osiedle Jaśminowe (phase III) in Poznań d) Zebra in Wrocław, e) Osiedle Jarzębinowe (phases IV and V), Nowa Dzielnica in Łódź. Projects planned to start for 2018 are listed in the chart below: REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

4 OFFICE PROJECTS PLANNDE TO START IN 2018 Project GLA [sqm] NOI [mln EUR] budget [mln PLN] Expenditure incurred [%] start completion Face 2 Face I Katowice, ul. Grundmanna ,4 142,0 14% II Q 2018 IV Q 2019 Browary Warszawskie K Warsaw, ul. Grzybowska ,2 137,6 22% II Q 2018 I Q 2020 Browary Warszawskie G i H Warsaw, ul. Grzybowska ,0 229,0 20% II Q 2018 I Q 2020 Moje Miejsce II Warsaw, ul. Beethovena ,8 117,0 22% IV Q 2018 II Q 2020 Piłsudskiego Łódź, ul. Piłsudskiego ,4 91,0 12% II Q 2018 IV Q 2019 Solidarności I Gdańsk, ul. Solidarności ,3 95,0 11% III Q 2018 I Q 2020 Total ,0 811,6 REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

5 RESIDENTIAL PROJECT TO START IN 2018 Project Sales area [sqm] No of units revenue [PLN mln] budget [mln PLN] Expenditures incurred [%] Tarteted start completion Rydla 32 Kraków, ul. Rydla ,4 34,8 26% I Q 2018 III Q 2019 Wita Stwosza I Kraków, ul. Wita Stwosza ,6 75,1 22% IV Q 2018 IV Q 2020 Garbary Poznań, ul. Garbary ,8 75,7 19% III Q 2018 II Q 2020 Osiedle Jaśminowe IV Poznań, ul. Sielawy ,7 21,8 12% I Q 2018 IV Q 2019 Moje Miejsce Warsaw, ul. Beethovena ,6 83,9 24% II Q 2018 I Q 2020 Browary Warszawskie E Warsaw, ul. Grzybowska ,8 62,6 18% IV Q 2018 II Q 2020 Osiedle Reset II Warsaw, ul. Taśmowa ,0 79,5 27% III Q 2018 III Q 2020 Grota-Roweckiego III Wrocław, ul. Grota-Roweckiego ,6 10,1 11% III Q 2018 I Q 2020 Ogrody Graua Wrocław, ul. Gdańska ,3 28,4 20% II Q 2018 I Q 2020 Total ,8 471,9 The first fair value valuation of Galeria Libero, Browary Warszawskie J, West Link and Sagittarius Business House caused the largest impact on the financial result in The change in the value of shares in EPP N.V. (PLN 112 mln) also had a significant impact on the result. A special dividend from the EPP Group for completing the construction of Outlet Park III and the expansion of the Galaxy in Szczecin was also recorded. The company continues to work on the optimization of its development processes. According to the information of the Management Board, it monitors the development of the real estate market closely and decisions regarding the implementation of projects are made individually, based on current market analysis. In order to mitigate the risk of unfavourable market changes, large projects are implemented in several stages. In 2017 the Group actively rented its commercial space. In the entire last year, the Company leased 84,000 sqm of office space (including leasing services for third parties for sqm. In retail facilities the Company leased in total 88,800 sqm (including leasing services for third parties for sqm. It has also achieved great success in the residential sector with a record number of 1,427 apartments sold. The company was observing the market in order to acquire new investment land, the crowning of which was the purchase of plots for PLN 335 mln, where a leasable or useable residential area of 360,000 sqm could be developed. The following assets have been purchased: - plots with a total area of 5,100 sqm on Piłsudskiego Avenue in Łódź, where a complex with a leasable area of app. 14,000 sqm could be developed; - perpetual usufruct right to a plot of land with an area of 8,600 sqm near Nowomiejska Street in Gdańsk, where an office complex with a leasable area of app. 30,000 sqm could be developed; - plots with a total area of 7,900 sqm on Powstańców Śląskich Street in Wrocław, where a leasable office area of app. 38,000 sqm could be developed; - plots with a total area of 32,800 sqm on Rakowicka and Wita Stwosza streets in Kraków, where a leasable and residential area of 44,000 sqm could be developed; - a company which owns the right of perpetual usufruct of real estate with a total area of 77,200 sqm located on Tymienieckiego Street in Łódź, where an office and residential area of about 80,000 sqm could REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

6 be developed; - plots with a total area of 44,000 sqm on Na Ostatnim Groszu and Horbaczewskiego streets in Wrocław, where an office area of app. 70,000 sqm could be developed; - perpetual usufruct right to real estate with an area of 24,900 sqm on Ordona Street in Warsaw, where a useable residential area of 48,000 sqm could be developed; - a plot of land with an area of sqm on Chłodna Street in Warsaw, where a residential area of 1,100 sqm could be developed; - a plot of land with an area of 9,500 on Kilińskiego Street in Łódź, where about 35,000 sqm of office space could be developed. Furthermore, the Company purchased a 30% interest in the companies which build Galeria Młociny in Warsaw. A large land bank enabling the Group to implement projects in all segments provides a good development outlook. Preparatory work already carried out will enable the Group to continue launching subsequent projects in upcoming years. As a socially responsible entity Echo participates in charity events and it sponsors events important for the environments in which the Company is active. In 2017 it engaged in the activities of such entities as: Children's Home No. 2 in Kielce, the Dobra Chata complex of facilities in Kielce, the Aleksander Kamieński Kamyk care and educational facility in Kielce, the activity of the Caritas hospice of Kielce Diocese, student sports club of the Żeromszczyzna association for the development of the Mąchocice Scholasteria and Ciekoty villages, a shelter for homeless animals in Dyminy, which is run by the Ark of Hope association, the Foundation for Assisting Disabled People, the women's football team at GKS Katowice, the Art and Innovation Space foundation, organization of National Conservation Days, the Soundedit festival in Łódź, the Great Orchestra of Christmas Charity foundation and organization of 2nd and 3rd Run for Fun [Bieg po Frajdę] in Poznań. 2. EVALUATION OF FULFILLING BY THE COMPANY THE DISCLOSURE REQUIREMENTS FOR THE CORPORATE GOVERNANCE PRINCIPLES In 2017 Echo Investment S.A. was subject to the corporate governance principles contained in the document Best Practices of WSE Listed Companies, adopted by Resolution no. 17/1249/2010 of the Council of WSE [Giełda Papierów Wartościowych S.A.] on 19 May 2010 (as amended). On 13 October 2015, the Council of WSE adopted a resolution regarding the adoption of a new set of corporate governance principles under the name Best Practices of WSE Listed Companies The new principles came into force on 1 January 2016 and they are still in effect. In 2017 and 2018 the Company carried out a review of Best Practices and it limited the number of exceptions from its application. Best practice principles applied at Echo Investment from 20 October 2017: Providing a record of the course of the General Meeting of Shareholders in the form of audio or video on the Company s website, conducting the procedure of confirming the independence of members of the, Introduction of the second independent member to the. After implementation of those principles, the Company publisher the report on Best Practices of WSE Listed Companies 2016, which is available on the Company s website Best practice principles applied at Echo Investment from 22 March 2018: The company publishes a description of the diversity policy being applied on its website, the Management Board declares that it will publish the justification for draft resolutions at the General Meeting each time and it will make every effort to receive such justification from Shareholders proposing resolutions and inform the remaining Shareholders about them, The Management Board confirms that the persons responsible for the internal audit functions in the Company report directly to the president or vice-president for finance, and they have the opportunity to directly report to the and the Audit Committee. Furthermore, the Company is in the process of creating the Internal Audit department, The Internal Audit Director who will be employed by the Company will meet the criteria and principles of independence set out in the generally recognized international standards of the professional audit practice, The topic of risk management and internal controls is discussed at every meeting of the and the Audit Committee, which are always attended by representatives of the Management Board. Possibility of participation of representatives of the media in the General Meeting of Shareholders, Presence or availability of representatives of the Management Board and during the General Meeting of Shareholders, Ensuring appropriate dates between the dividend day and the dividend payment date, REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

7 The attention of the Company s Management Board to the appropriate level of the nominal value of the shares, control over significant transactions concluded with shareholders holding at least 5% of the total number of votes and shares, Publication of the report on the remuneration policy. The current information on the rules of Best Practices that the Company does not fully apply is available on the corporate website: 3. SUPERVISORY BOARD REPORT IN 2017 In 2017 the of Echo Investment S.A. conducted its operations in accordance with its rules and regulations, the Statute adopted by the Company, Best Practice of GPW Listed Companies and the generally applicable law, always bearing in mind the best interest of the Company and the good of its Shareholders and other stakeholders. In 2017 Members of the stayed permanently in touch with Members of the Management Board, holding numerous consultations on specific areas of the Company s activities. The constantly supervised the Company operations in all sectors of its activities. The operations included, among other things, - the analysis and evaluation of the current financial results and periodic financial reports of the Company, - the analysis of the information concerning the Company s activities obtained from the Management Board, - granting permission for accepting obligations by the Company and signing agreements connected with the Company s activities, - the supervision of the administrative procedures concerning the projects implemented by the Group, In 2017 the composition of the was increased by one member meeting the independence criteria set out in the Act of 11 May 2017 on statutory auditors, audit companies and public supervision. In December 2017 one of the members of the resigned from their position in the. As at 31 December 2017 the following persons were members of the : - Karim Khairallah Chairman of the - Laurent Luccioni Deputy Chairman of the - Mark Abramson Independent Member of the - Sebastian Zilles Member of the - Maciej Dyjas Member of the - Nebil Senman Member of the - Stefan Kawalec Independent Member of the In 2017, while performing its duties, the passed 30 resolutions concerning issues arising under the Commercial Code and Articles of Association of Echo Investment S.A., and it held three meetings. THE COMPANY AUDIT COMMITTEE The Audit Committee includes three members. In the period from 1 January 2017 until 19 October 2017 the Audit Committee consisted of: - Stefan Kawalec Chairman (independent member of the ) - Maciej Dyjas member - Nebil Senman member In the period from 19 October 2017 until 31 December 2017 the Audit Committee consisted of: REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

8 - Stefan Kawalec Chairman (independent member of the ) - Mark Abramson member of the Committee, independent member of the - Nebil Senman member Thus, since 19 October 2017 the Audit Committee has met the requirements resulting from the Act on Auditors, Audit Companies and Public Supervision of 11 May 2017, according to which the majority of Audit Committee members, including its Chairman, must fulfil independence criteria. In 2017 the Audit Committee focused on the following issues: - Monitoring the financial reporting process. - Monitoring of the audit process of the financial reports by the auditor. - Monitoring and controlling the independence of the auditor. - Monitoring of risk control systems and internal control. - Monitoring the implementation of the recommendations of the auditor and the Audit Committee regarding changes aimed at strengthening the effectiveness of risk control systems and internal control. - Supervising and participating in the recruitment of employees to the internal audit unit. - Analysis of selected risks in the Company's operations. - Monitoring the implementation of the requirements arising from the new act on auditors by the Company. 4. EVALUATION OF INTERNAL CONTROL SYSTEM, RISK MANAGEMENT, COMPLIANCE AND INTERNAL AUDIT IN THE COMPANY Starting from February 2018, in the Company an Internal Audit Department was formed, which scope of activities include: - Analysis of compliance of internal processes in terms of their correctness with applicable law, external conditions and internal company standards, - Recommending corrective actions and suggesting changes in internal processes in order to optimize business and reduce potential risks (financial, operational, legal), - Cooperating with key company managers in order to develop optimal solutions, especially in the area of project cost optimization, - Supporting the organization in the process of searching for synergies between particular departments and projects, - Implementing and monitoring of internal control procedures, - Developing internal audit tools and good practices in this area, - Periodically presenting audit results to the Audit Committee and the Management Board of the Company. In 2018, the Audit Department will focus on the audit related to the construction activity of the Company. Starting from 2019, the department will implement the full range of tasks relevant to the internal audit of a public company. A detailed list of the main features of the internal control and risk management systems applied by the Company were presented by the Board in the corporate governance report for THE SUPERVISORY BOARD S STANCE ON THE ALLOCATION OF PROFIT The has familiarised itself with the proposal of the Company s Management concerning the division of the net profit of PLN 632,496, made by Echo Investment S.A. in 2017 among its shareholders and allocating PLN 206,345,291 to the dividend payment, PLN 213,075, to the supplementary capital and PLN 213,075, to the reserve capital the Dividend Fund. The accepts the Management s stance and intends to communicate such information to the General Meeting of Shareholders. REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR

9 6. THE SUPERVISORY BOARD'S STANCE ON THE ALLOCATION OF UNDIVIDED RESULT (PROFIT) FROM PREVIOUS YEARS The has familiarised itself with the proposal of the Company s Management concerning the allocation of the undivided result (profit) from previous years in the net amount of PLN 2,164, obtained by the Company as a result of a change in the accounting principles applied and its allocation to the supplementary capital. The accepts the Management s stance and intends to communicate such information to the General Meeting of Shareholders. Signatures Karim Khairallah Chairman of the Supervisory Board Laurent Luccioni Deputy Chairman of the Sebastian Zilles Member of the Maciej Dyjas Member of the Mark Abramson Member of the Nebil Senman Member of the Stefan Kawalec Member of the REPORT OF ECHO INVESTMENT S.A. SUPERVISORY BOARD FOR