INTERIM CONDENSED CONSOLIDATED REPORT OF THE CAPITAL PARK GROUP FOR H (PLN 000) I. REPRESENTATIONS OF THE MANAGEMENT BOARD...

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1 INTERIM CONDENSED CONSOLIDATED REPORT OF THE CAPITAL PARK GROUP FOR THE FIRST HALF OF 2015

2 INTERIM CONDENSED REPORT OF THE CAPITAL PARK GROUP FOR H1 2015

3 TABLE OF CONTENTS I. REPRESENTATIONS OF THE MANAGEMENT BOARD... 3 II. CONSOLIDATED FINANCIAL HIGHLIGHTS GENERAL INFORMATION INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note1. INVESTMENT PROPERTY Note2. OTHER NON-CURRENT FINANCIAL ASSETS Note3. OTHER NON-CURRENT ASSETS Note4. INVENTORIES Note5. OTHER RECEIVABLES AND OTHER CURRENT ASSETS Note6. TRADE RECEIVABLES Note7. OTHER CURRENT FINANCIAL ASSETS Note8. CASH AND CASH EQUIVALENTS Note9. EQUITY Note10. BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES Note11. LIABILITIES UNDER NOTES IN ISSUE Note12. OTHER LIABILITIES AND PROVISIONS Note13. TRADE PAYABLES Note14. RENTAL INCOME Note15. OPERATING EXPENSES BY NATURE Note16. GAIN AND LOSS ON INVESTMENT PROPERTY REVALUATION Note17. FINANCE INCOME AND COSTS Note18. CURRENT AND DEFERRED INCOME TAX Note19. GUARANTEES AND SURETIES Note20. SECURITY ESTABLISHED ON THE GROUP S ASSETS Note21. OPERATING SEGMENTS Note22. EARNINGS PER SHARE Note23. FINANCIAL INSTRUMENTS Note24. FINANCIAL RISK MANAGEMENT Note25. CAPITAL MANAGEMENT Note26. INCENTIVE SCHEME FOR MEMBERS OF THE MANAGEMENT BOARD Note27. RELATED-PARTY TRANSACTIONS Note28. EVENTS SUBSEQUENT TO THE REPORTING DATE

4 I. REPRESENTATIONS OF THE MANAGEMENT BOARD Representation of Capital Park S.A. s Management Board on the reliability of the interim condensed consolidated financial statements and the Directors Report on the Group s operations The Management Board of Capital Park S.A. represents that, to the best of its knowledge, these interim condensed consolidated financial statements of the Capital Park Group and the comparative data have been prepared in compliance with the applicable accounting standards and give a true, fair and clear view of the Group s assets, financial position and financial performance. These financial statements give a true picture of the Group s development, achievements and standing; they also include a description of key risks and threats. These financial statements have been prepared on the assumption that the Capital Park Group will continue as a going concern in the foreseeable future. At the date of signing these financial statements, the Parent s Management Board was aware of no facts or circumstances that would indicate a threat to the Group s continuing as a going concern in the 12 months after the reporting date, as a result of any planned or forced discontinuation or material downsizing of its existing operations. Warsaw, August 25th 2015 SIGNATURES OF MANAGEMENT BOARD MEMBERS: Jan Motz President of the Management Board Jerzy Kowalski Member of the Management Board Marcin Juszczyk Member of the Management Board Michał Koślacz Member of the Management Board 3

5 Representation of the Capital Park S.A. s Management Board on the entity qualified to review the interim condensed consolidated financial statements of the Group The Management Board of Capital Park S.A. represents that the auditing firm and the auditor who reviewed the interim condensed consolidated financial statements of the Capital Park Group met the conditions required to issue an impartial and independent review report, in accordance with the applicable laws and professional standards. Warsaw, August 25th 2015 SIGNATURES OF MANAGEMENT BOARD MEMBERS: Jan Motz President of the Management Board Jerzy Kowalski Member of the Management Board Marcin Juszczyk Member of the Management Board Michał Koślacz Member of the Management Board 4

6 II. CONSOLIDATED FINANCIAL HIGHLIGHTS Jun Dec PLN 000 EUR 000 PLN 000 EUR 000 Total assets 1,903, ,787 1,858, ,093 Investment property 1,706, ,966 1,595, ,442 Cash and cash equivalents 93,167 22, ,586 39,787 Equity 934, , , ,874 Non-current liabilities 884, , , ,623 Current liabilities 84,325 20, ,771 39,596 6 months months 2014 PLN 000 EUR 000 PLN 000 EUR 000 Operating income 36,131 8,740 22,326 5,343 Revaluation of properties (48,112) (11,638) 12,849 3,075 Profit before tax (34,921) (8,447) 13,434 3,215 Net profit (39,033) (9,442) 10,760 2,575 Cash flows from operating activities 2, Cash flows from investing activities (150,376) (36,375) (165,715) (39,660) Cash flows from financing activities 71,586 17, ,962 63,652 5

7 INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE CAPITAL PARK GROUP FOR THE FIRST HALF OF

8 1. GENERAL INFORMATION 1.1. PARENT Name: Legal form: Registered office: Country of incorporation: Principal business activities: Capital Park S.A. Joint-stock company (spółka akcyjna) ul. Marynarska 11, Warsaw, Poland Poland holding management activities development of building projects buying and selling of own real estate renting and operating of own real estate Registry court: District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register National Court Register (KRS) number: Industry Identification Number (REGON) DURATION OF THE GROUP The Parent (Capital Park S.A.) and the other Group entities were incorporated for an indefinite period PRESENTED PERIODS These interim condensed consolidated financial statements contain data for the period January 1st June 30th 2015, and comprises: Statement of financial position as at June 30th 2015, showing total assets and total equity and liabilities of PLN 1,903,362 thousand; Statement of profit or loss and other comprehensive income for the period January 1st June 30th 2015, showing net loss of PLN 39,033 thousand; Statement of changes in equity for the period January 1st June 30th 2015, showing a decrease in equity of PLN 44,824 thousand; Statement of cash flows for the period January 1st June 30th 2015, showing a net decrease in cash of PLN 76,419 thousand; Notes to the financial statements. The comparative data in the consolidated financial statements is presented: in the consolidated statement of profit or loss and other comprehensive income and consolidated statement of cash flows for the period January 1st June 30th 2014, in the consolidated statement of financial position as at June 30th 2014 and December 31st 2014, in the consolidated statement of changes in equity for the periods January 1st June 30th 2014 and July 1st December 31st 2014, 7

9 and has been prepared in accordance with International Accounting Standards and International Financial Reporting Standards (IFRS) MEASUREMENT OF ITEMS DENOMINATED IN FOREIGN CURRENCIES The following exchange rates are used in these financial statements: Jan Jun Jan Dec Jan Jun EUR/PLN Exchange rate effective for the end of the reporting period Average exchange rate in the reporting period INDEPENDENT AUDITORS PKF Consult Sp. z o.o.; ul. Orzycka 6, suite 1B, Warsaw, Poland 1.6. LAWYERS Ishikawa Brocławik Sajna Sp.p. Adwokaci i Radcowie Prawni Al. Słowackiego 66, Kraków, Poland 1.7. BANKS AND FINANCIAL INSTITUTIONS Bank Polska Kasa Opieki S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Alior Bank S.A., Bank BGŻ BNP Paribas S.A., Pekao Bank Hipoteczny S.A., Getin Noble Bank S.A., mleasing Sp. z o. o., mbank S.A., Raiffeisen-Leasing Polska S.A., Raiffeisen Bank Polska S.A., Bank Zachodni WBK S.A., BOŚ Bank S.A, ING Bank Śląski S. A., The Royal Bank of Scotland PLC, Hypo Noe Gruppe Bank AG PARENT S GOVERNING BODIES In the reporting period, there were no changes in the composition of the Parent s Management Board, Supervisory Board or any of the Supervisory Board permanent committees CAPITAL PARK S.A. S SHAREHOLDING STRUCTURE As at June 30th 2015, shareholders holding 5% or more of total voting rights at the General Meeting of the Parent were as follows: Number of % ownership Number of % of total Shareholder shares interest voting rights voting rights CP Holdings S. à r. l. 77,414, % 77,414, % Jan Motz 2,805, % 5,571, % Other 25,127, % 25,127, % Total 105,348, % 108,113, % As at the date of these interim condensed financial statements, shareholders holding 5% or more of total voting rights at the General Meeting of the Parent were as follows: 8

10 Number of % ownership Number of % of total Shareholder shares interest voting rights voting rights CP Holdings S. à r. l. 77,359, % 77,359, % Jan Motz 2,805, % 5,571, % Other 25,182, % 25,182, % Total 105,348, % 108,113, % STRUCTURE OF THE GROUP a) Below is presented a list of companies directly and indirectly related to the Parent, consolidated as at June 30th 2015: Ownership interest and voting No. Name Registered office Principal business activity rights held (%) 1 Alferno Investments Sp. z o.o. Warsaw Development of building projects 100% 2 ArtN Sp. z o.o. 1 Warsaw Development of building projects 100% 3 Aspire Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 4 Capital Park Gdańsk Sp. z o.o. Warsaw Construction of buildings and property management 100% 5 Capital Park Kraków Sp. z o.o. Warsaw Development of building projects and property management 100% 6 Capital Park Racławicka Sp. z o.o. Warsaw Construction of buildings and property management 100% 7 Capital Park Opole Sp. z o.o. 2 Warsaw Construction of buildings and property management 100% 8 CP Development S. à r. l. Luxembourg Activities of holding companies 100% 9 CP Invest S.A. Warsaw Activities of holding companies 100% 10 CP Management Sp. z o.o. Warsaw Construction of buildings and property management; 100% management of Group s projects 11 CP Property Sp. z o.o. 10 Warsaw Activities of holding companies 15% 12 CP Property Sp. z o.o. SPV1 SK 3 Warsaw Retail property management 15% 13 CP Property Sp. z o.o. SPV2 SK 3 Warsaw Retail property management 15% 14 CP Property Sp. z o.o. SPV3 SK 3 Warsaw Retail property management 15% 15 CP Property Sp. z o.o. SPV4 SK 3 Warsaw Retail property management 15% 16 CP Property Sp. z o.o. SPV5 SK 3 Warsaw Retail property management 15% 17 CP Property Sp. z o.o. SPV6 SK 3 Warsaw Retail property management 15% 18 CP Property S. à r.l. Luxembourg Activities of holding companies 15% 19 CP Property S.C. SP Luxembourg Activities of holding companies 15% 20 CP Retail BV The Netherlands Activities of holding companies 100% 21 CP Retail ( SPV1 ) Sp. z o.o. 12 Warsaw Construction of buildings and property management 100% 22 CP Retail (SPV2) Sp. z o.o. Warsaw Construction of buildings and property management 100% 23 Dakota Investments Sp. z o.o. 12 Warsaw Construction of buildings and property management 100% 24 Diamante Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 9

11 No. Name Registered office 25 DT-SPV 12 Sp. z o.o. 4 Warsaw 26 Elena Investments Sp. z o.o. 2 Warsaw 27 Emir 30 Sp. z o.o. Warsaw 28 Principal business activity Construction of buildings and property management Construction of buildings and property management Construction of buildings and property management Ownership interest and voting rights held (%) 100% 100% 100% Fundacja Otwartego Muzeum 5 Dawnej Fabryki Norblina Warsaw Foundation 100% Construction of buildings and Warsaw Private equity investment fund 15% 29 Hazel Investments Sp. z o.o. Warsaw property management 100% 30 Marcel Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 31 Marlene Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 32 Nerida Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 33 Orland Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 34 Patron Wilanow S. à r. l. 6 Luxembourg Activities of holding companies 64% Real Estate Income Assets Fundusz 35 Inwestycyjny Zamknięty Aktywów Niepublicznych 7 36 Sagitta Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 37 Sander Investments Sp. z o.o. Warsaw Development of building projects 100% 38 Sapia Investments Sp. z o.o. Warsaw Development of building projects 100% 39 Sapia Investments Sp. z o.o. Sp.Kom. 8 Warsaw Development of building projects 67% 40 Silverado Investments Sp. z o.o. 11 Warsaw Construction of buildings and property management 100% 41 Rezydencje Pałacowa Sp. z o.o. 9 Warsaw Development of building projects 64% 42 RM1 Sp. z o.o. 9 Warsaw Construction of buildings and property management 64% 43 Vera Investments Bis Sp. z o.o. 2 Warsaw Construction of buildings and property management 100% 44 Zoe Investments Sp. z o.o. Warsaw Construction of buildings and property management 100% 45 Sporty Department Store Sp. z o.o. ⁵ Warsaw Retail sale 90% 46 Oberhausen Sp. z o. o. 13 Warsaw Construction of buildings and property management 53% Notes: Subsidiary of CP Development S. à r. l. Subsidiaries of CP Management Sp. Ltd. Subsidiaries of Real Estate Income Assets Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych and CP Property Sp. z o.o. (general partner, holds 1% of shares in each company, and 0.1% share in the companies profits). The Company holds indirectly 15% of the share capital in these companies; however, it has full power to control the entities under relevant management contracts. Subsidiary of Vera Investments Bis Sp. z o.o. and CP Management Sp. z o.o. Subsidiary of ArtN Sp. z o.o. The Company holds 50% of the share capital and voting rights in Patron Wilanow S. à r. l., and the right to a 64% share in its profits. Subsidiary of CP Retail B. V. The Company holds 15% of certificates, however, it has full power to control the entities under relevant management contracts. Subsidiary of Sapia Investments Sp. Ltd. A 33% interest in the company is held by a third party. Subsidiaries of Patron Wilanow S. à r.l. The Company indirectly holds 50% of the share capital and voting rights in Rezydencje Pałacowa Sp. z o.o. and RM1 Sp. z o.o., as well as the right to a 64% share in their profits. Subsidiaries of Real Estate Income Assets Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych. The Group indirectly holds 15% of shares in the company s share capital. Subsidiary of DT-SVPV 12 Sp. z o. o. Subsidiaries of CP Retail B.V. 10

12 13 Entity jointly controlled by CP Retail B.V., which holds a 53% interest under a JV agreement; the remaining 47% are held by Galaxy Real Estate Sp. z o.o., an Akron Group company. Basis of full consolidation of the assets, liabilities, profit or loss of the REIA FIZ AN Group entities, i.e. subsidiaries of CP Retail B.V., that is: CP Property Sp. z o.o.; CP Property Sp. z o.o. SPV 1 SK, CP Property Sp. z o.o. SPV 2 SK, CP Property Sp. z o.o. SPV 3 SK, CP Property Sp. z o.o. SPV 4 SK, CP Property Sp. z o.o. SPV 5 SK, CP Property Sp. z o.o. SPV 6 SK, CP Property S. C. SP, CP Property S. à r. l. and Real Estate Income Assets Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych ("FIZ AN"; closed end private equity investment fund). On May 13th 2013, Capital Park S.A. and Open Finance Towarzystwo Funduszy inwestycyjnych S.A. ("TFI") executed an agreement to establish an investment fund whose principal business activity would be property management to pay dividends to investors in REIA FIZAN investment certificates. Under the agreement and pursuant to Art of the Act on Investment Funds, the management of REIA FIZAN investment portfolio was transferred to CP Management Sp. z o.o., a subsidiary of CP S.A. with qualified asset-management resources. On May 16th 2013, CP Management, a subsidiary of Capital Park S.A., executed an agreement with TFI for the management of REIA FIZAN. Under the agreement CP Management Sp. z o.o. has full discretion to make decisions regarding REIA FIZAN s investment policy; in particular, it may make investment decisions concerning REIA FIZAN assets, place bids and negotiate terms of transactions to buy or sell assets. Also, pursuant to the above agreement, CP Management Sp. z o. o. s fees depends on the net asset value of the portfolio of assets under its management. CP Management Sp. z o.o. also renders property management services to the Special Purpose Vehicles in which REIA FIZAN invests, i.e.: CP Property Sp. z o.o. SPV 1 SK, CP Property Sp. z o.o. SPV 2 SK, CP Property Sp. z o.o. SPV 3 SK, CP Property Sp. z o.o. SPV 4 SK, CP Property Sp. z o.o. SPV 5 SK; CP Property Sp. z o.o. SPV 6 SK. In particular, CP Management Sp. z o.o. s services consist in property administration, negotiating terms of rental contracts with tenants, searching for additional sources of revenue, preparing investment budgets, settlements of service costs with tenants, and maintaining relations with external institutions. The terms of the agreements described above expose CP Management Sp. z o.o. to risks and benefits related to changes in REIA FIZAN s net asset value, and to SPVs results on property rentals. In accordance with IFRS 27, effective for financial statements for annual periods beginning on or after January 1st 2013, and with IFRS 10, applicable to the Company as of January 1st 2014, an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Given the provisions of the management agreements and the IFRS principles regarding control, the Capital Park Group assumes that it controls operations of these entities and is exposed to their profit or loss. The management agreements have been entered into for a period of three years, i.e. they will expire in 2016 if terminated by the Service Buyer. Otherwise, they will be automatically extended by further five years. The Group intends to continue its involvement in the REIA FIZ AN project in the coming years. Consequently, the Group consolidates profit or loss, assets and liabilities of the above mentioned entities with the full method, and discloses non-controlling interests corresponding to this part of the assets, liabilities, profit or loss which is attributable to the investment certificates sold to investors outside the Group. Method used to account for interests in jointly-controlled entities, i.e. Patron Wilanów S. à r. l., Rezydencje Pałacowa Sp. z o. o., RM 1 Sp. z o. o., and Oberhausen Sp. z o.o. (equity-accounted investees) 11

13 In accordance with Appendix C to IFRS 11 Joint Arrangements, the Group discloses its equity interests in jointlycontrolled entities at cost net of the aggregate results generated by these entities from the acquisition date to the reporting date which are attributable to non-controlling interests (equity method). All Group s receivables from and liabilities towards these entities are classified as transactions with non-related entities. b) Changes in the Group s structure during the reporting period, i.e. January 1st June 30th 2015: New Group companies On March 20th 2015, Sporty Department Store Sp. z o.o. was established, with the following shareholders: ArtN Sp. z o. o., a subsidiary of CP S.A., holding 90% of the shares, and Ms Kinga Nowakowska, holding 10% of the shares. The company is to conduct retail sale of sports equipment in specialized stores. On April 1st 2015, CP Retail B.V. of the Netherlands, a subsidiary of Capital Park S.A., acquired a 53% interest, with a nominal value of PLN 5 thousand, in the share capital of Oberhausen Sp. z o.o. of Warsaw. The remaining 47% interest in the company is held by Galaxy Real Estate Sp. z o.o., an Akron Group company. The agreement provides for the acquisition, alteration and management of a shopping centre in Gdańsk REPRESENTATIONS OF THE MANAGEMENT BOARD The Parent s Management Board hereby represents that, to the best of its knowledge, these consolidated financial statements and the comparative data have been prepared in compliance with the applicable accounting policies applied by the Group, and give a true, fair and clear view of the Group s assets, financial standing and financial performance. These financial statements have been prepared on the assumption that the Capital Park Group will continue as a going concern in the foreseeable future. At the date of signing these financial statements, the Parent s Management Board was aware of no facts or circumstances that would indicate a threat to the Group s continuing as a going concern in the 12 months after the reporting date, as a result of any planned or forced discontinuation or material downsizing of its existing operations. These interim condensed consolidated financial statements for the first half of 2015 have been prepared in accordance with IAS 34 Interim Financial Reporting and the Regulation of the Minister of Finance on current and periodic information to be published by issuers of securities and conditions for recognition as equivalent of information whose disclosure is required under the laws of a non-member state, dated February 19th 2009 (Dz.U. No. 33, item 259, as amended). The Parent s Management Board represents that the qualified auditor that reviewed these consolidated financial statements was appointed in compliance with the applicable laws, and that both the auditing firm and the auditors who performed the review met the conditions required to issue an impartial and independent auditor s report, in accordance with the applicable provisions of Polish law. The auditor was appointed by the Extraordinary General Meeting of Capital Park S.A. by virtue of Resolution No. 1/06/15 of June 19th 2015 on appointment of the auditor. The Extraordinary General Meeting selected the auditor with due regard for the impartiality and objectivity of the selection itself, as well as of the performance of the auditor s tasks. 12

14 1.12. APPROVAL OF FINANCIAL STATEMENTS These interim condensed consolidated financial statements were approved for issue and signed by the Parent s Management Board on August 25th Warsaw, August 25th 2015 SIGNATURE OF THE PERSON WHO PREPARED THE FINANCIAL STATEMENTS: Małgorzata Koc Chief Accountant SIGNATURES OF MANAGEMENT BOARD MEMBERS: Jan Motz President of the Management Board Michał Koślacz Member of the Management Board Marcin Juszczyk Member of the Management Board Jerzy Kowalski Member of the Management Board 13

15 2. INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Note Jun Dec Jun Non-current assets Investment property 1 1,706,977 1,595,986 1,516,926 Deferred tax assets 18 17,979 20,265 13,769 Other financial assets 2 15,134 19,922* 31,823* Other non-current assets 3 1, ,383 Current assets 1,741,341 1,636,829 1,565,901 Inventory 4 18,771 24,452 31,856 Other receivables and other current assets 5 23,817 16,149 18,822 Trade receivables 6 5,086 5,933 3,180 Other financial assets 7 21,180 5,809 5,693 Cash and cash equivalents 8 93, , , , , ,106 TOTAL ASSETS 1,903,362 1,858,758 1,794,007 EQUITY AND LIABILITIES Note Jun Dec Jun Equity Share capital 9 105, , ,744 Statutory reserve funds 858, , ,320 Other capital reserves 9 13,912 12,568 12,994 Exchange differences on translating foreign operations (5,112) Retained earnings/(deficit) (61,014) Net profit/(loss) for the current period (42,292) (61,468) 8,469 Non-controlling interests 9 65,805 64,776 71, , ,791 1,056,456 Non-current liabilities Bank borrowings and other financial liabilities , , ,268 Liabilities under notes in issue , ,344 97,878 Other liabilities and provisions 12 5,292 3,665* 3,207* Deferred tax liabilities 18 14,707 13,309 16, , , ,952 Current liabilities Bank borrowings and other financial liabilities 10 23,242 44,739 41,770 Liabilities under notes in issue 11 11,062 67,398 38,990 Trade payables 13 9,922 14, Other liabilities and provisions 12 40,099 42,065 29,983 84, , ,599 TOTAL EQUITY AND LIABILITIES 1,903,362 1,858,758 1,794,007 Change in presentation of data for previous years. The joint venture assets and liabilities are presented on a net basis, reflecting the Group s aggregate interests in joint ventures. For details, see Note 2. 14

16 3. INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note 6 months months 2014 Rental income 14 34,996 21,672 Property operating expenses 15 (9,785) (5,804) Net operating profit 25,211 15,868 Income from property management Loss (gain) on disposal of investment property 0 (555) Other revenue Cost of operation of SPVs 15 (3,097) (3,109) General and administrative expenses 15 (3,257) (2,187) Renovation and repair of property 15 (322) (71) Cost of share-option plan measurement 15 (1,469) (3,468) Loss/gain on investment property revaluation 16 (48,112) 12,849 Share in net profit/loss of equity-accounted entities 2,055 (1,006) Operating loss/profit (27,856) 19,530 Interest income 17 1,389 2,235, Interest expense 17 (17,617) (6,467) Other finance income and costs 17 9,163 (1,864) Loss/profit before tax (34,921) 13,434 Income tax 18 (4,112) (2,674) Net loss/profit (39,033) 10,760 Exchange differences on translating foreign operations (5,509) 2,319 Total comprehensive income (44,542) 13,079 Net loss/profit attributable to owners of the parent (42,292) 8,469 Net profit attributable to non-controlling interests 3,259 2,291 Net earnings/(loss) per share (PLN) Basic (0.40) 0.08 Diluted (0.40) 0.08 The entire loss was generated from continuing operations. 15

17 FOR H (PLN 000) 4. INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital Statutory reserve funds Capital reserves from issue of shares pending registration Other capital reserves Exchange differences on translating foreign operations Retained earnings/(deficit) Net profit/(loss) for the current period Non-controlling interests Total equity Equity as at Jan , , , (61,468) 64, ,791 Issue of shares Share-based payments , ,344 Profit distribution (61,468) 61, Dividend payment (2,230) (2,230) Total comprehensive income (5,509) 0 (42,292) 3,259 (44,542) Equity at Jun , , ,912 (5,112) (61,014) (42,292) 65, ,967 Equity as at Jan , , ,185 9,526 (1,940) (25,097) 25,551 68,807 1,038,400 Issue of shares 30, ,511 (217,185) ,511 Share-based payments , ,468 Profit distribution ,551 (25,551) 0 0 Total comprehensive income , ,469 2,291 13,077 Equity at Jun , , , ,469 71,098 1,056,456 Equity as at Jul , , , ,469 71,098 1,056,456 Issue of shares Share-based payments (426) (426) Profit distribution Dividend payment (4,113) (4,113) Total comprehensive income (69,937) (2,209) (72,126) Equity as at Dec , , , (61,468) 64, ,791 16

18 5. INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 6 months 6 months OPERATING ACTIVITIES Profit/(loss) before tax (34,921) 13,434 Foreign exchange losses (13,507) (672) Interest and profit distributions 8,085 (4,268) Loss (profit) from investing activities 40,214 (12,520) Change in receivables (661) (2,196) Change in liabilities, net of borrowings 10,156 2,511 Valuation of employee share plan 1,344 3,468 Change in other assets (3,956) (2,602) Change in provisions (2,844) 1,760 Impairment losses 5,487 8,523 Amortisation and depreciation Other adjustments Total adjustments 44,491 (5,470) Cash from operating activities 9,570 7,964 Income tax refunded/(paid) (226) (169) Change in VAT from investing activities (6,973) (7,502) A. Net cash from operating activities 2, INVESTING ACTIVITIES Interest on deposits 603 1,515 Proceeds from disposal of investment property and inventories 1,934 2,541 Other cash provided by investing activities 0 39 Purchase of investment property (152,059) (168,141) Purchase of shares (5) (65) Loans advanced (330) (1,468) Purchase of intangible assets and property, plant and equipment (519) (136) B. Net cash from investing activities (150,376) (165,715) FINANCING ACTIVITIES Proceeds from issue of shares 0 131,795 Proceeds from issue of notes 44,231 35,000 Proceeds from borrowings 123, ,107 Dividends and other distributions to owners (2,230) (1,881) Interest (22,449) (5,836) Redemption of notes (55,000) 0 Repayment of borrowings, lease payments (16,914) (11,223) C. Net cash from financing activities 71, ,962 D. Total net cash flows (76,419) 100,541 E. Net (decrease)/increase in cash and cash equivalents: (76,419) 100,541 F. Cash and cash equivalents at beginning of period 169,586 68,014 G. Cash and cash equivalents at end of period 93, ,555 17

19 6. SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.1 STATEMENT OF COMPLIANCE These interim condensed consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as endorsed by the European Union and in effect on June 30th In accordance with IAS 1 Presentation of Financial Statements, the IFRS comprise the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). 6.2 BASIS OF PREPARATION The data contained in these interim condensed consolidated financial statements is presented in thousands of PLN (the Group s functional currency and presentation currency), rounded to the nearest thousand. These interim condensed consolidated financial statements were reviewed by an independent auditor. The auditor s report is attached to these consolidated financial statements. 6.3 BASIS OF CONSOLIDATION Subsidiaries Subsidiaries are all entities over which the Group has control and power to govern their financial and operating policies. Such power is usually derived from the holding of the majority of voting rights in the entity s governing bodies. While assessing whether the Group controls a given entity in accordance with IFRS 10, it takes into consideration the existence and effect of potential voting rights which may be exercised or converted at a given time as well as whether it is exposed to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In order to determine the status of each entity whose financial data may be subject to consolidation, the Group analyses whether it has retained control over the entity in line with the criteria described above as at the end of each reporting period, i.e. as at the end of each calendar quarter. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, unless the control is temporary. The Group applies the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at fair value, calculated as the sum of the acquisition-date net fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer, in accordance with IFRS 3. Any excess of the acquisition cost over the fair value of the Group s interest in the identifiable net assets acquired is recognised as goodwill. If the acquisition cost is lower than the fair value of the net assets of the acquiree, the difference is recognised directly in profit or loss. The Group ceases to consolidate an entity from the moment it loses control of the entity. The Parent s control over a subsidiary ceases when it loses the power to govern the financial and operating policies of the subsidiary. Control may be lost with or without a concurrent change in the absolute or relative interest in the entity. 18

20 Jointly-controlled entities Jointly-controlled entities, i.e. entities with respect to which the Group does not have the full power to control their financial and operating policies despite having a majority share in their profit or loss, are accounted for in these consolidated financial statements using the equity method, in accordance with IFRS 11. Shares and investment certificates held by non-controlling interests and transactions with non-controlling interests Shares and investment certificates held by non-controlling interests include shares and investment certificates in consolidated companies held by non-group entities. Non-controlling interests are measured at the acquisition-date net assets of the related entity attributable to non-group entities. Identified non-controlling holdings of shares and investment certificates in net assets of consolidated subsidiaries are recognised in the Group s statement of financial position under equity separately from the Parent s ownership interest in such net assets. Non-controlling holdings of shares and investment certificates in net assets of a consolidated entity are determined for each reporting date; these include: the value of shares and investment certificates held by non-controlling interests at the original combination date, calculated in accordance with IFRS 3, changes in equity attributable to shares and investment certificates held by non-controlling interests from the combination date to the reporting date. Profit and loss and each component of other comprehensive income are attributed to owners of the Parent and noncontrolling interests. Total comprehensive income is attributed to owners of the Parent and non-controlling interests, even if as a result the value of the non-controlling interests becomes negative. Consolidated companies These interim condensed consolidated financial statements for the first six months ended June 30th 2015 cover the entities listed in Section 1.10 of these financial statements. Methods of accounting Subsidiaries with respect to which the Group has the full power to control their financial and operating policies are consolidated with the full method. In the case of subsidiaries of REIA FIZ AN (listed in Section 1.10 above), in which the Group holds a 15% equity interest, equity holdings of non-controlling interests were determined. The shares held by the Group in Sapia Investments Spółka z ograniczoną odpowiedzialnością Spółka Komandytowa, representing less than a 100% interest in its share capital, are classified in consolidated equity as non-controlling interests. The interests held in entities jointly controlled by the Company, that is: Patron Wilanów S.à r.l., Rezydencje Pałacowa Sp. z o.o., RM 1 Sp. z o.o., and Oberhausen Sp. z o.o., are accounted for using the equity method, which means that the Group includes only net profit/(loss) of those entities in its consolidated data (in proportion to the Group s share in net profit/(loss) of those companies). The basis of consolidation of the financial data of subsidiaries is presented in detail in Section 1.10 of these interim condensed financial statements. 19

21 6.4 SIGNIFICANT ACCOUNTING POLICIES Investment property Investment property includes land and buildings, or parts of land or buildings, owned, held in perpetual usufruct or leased by a Group company, which are used to generate economic benefits from their fair value growth or rental income (or both). Investment property measured at fair value also includes investment property under construction, i.e. before it is placed into service, as well as projects that the Group is planning to implement in the coming years, as the Management Board does not rule out the possibility of selling a property at any stage of project execution. Properties which are held partially for capital appreciation or to earn rentals and partially used the Group s own needs as owner-occupied property are accounted for in line with the policies applicable to the prevailing portion (no less than 90% of the area) of the property, with due regard for the materiality principle. A property is classified as investment property upon initial recognition. An item may be reclassified from investment property into another asset category based on the Management Board s decision to change the intended purpose or function of a given asset. Investment property is recognised as an asset if it is probable that the future economic benefits associated with the investment property will flow to the entity and the cost of the investment property can be measured reliably. Investment property is initially measured at cost, including transaction costs, i.e. costs directly related to the purchase transaction (legal fees, commission of purchase of property, taxes and charges relating to the purchase of property). The initial cost of an interest in property held under a lease is determined as prescribed for a finance lease by IAS 17, i.e. at the lower of the fair value and the present value of minimum lease payments. The value of investment properties which are self-constructed buildings is established in accordance with IAS 16. The cost of self-constructed property is its cost determined at the date on which construction works are completed and the property is made ready for use. The cost of investment property includes the following costs incurred until a given property is placed in service: direct construction costs, designing costs, and all other costs incurred in order to carry out the construction process as intended by the entity s Management Board, indirect costs of advisory services strictly related to supporting and managing the construction process, and costs of intermediation in transactions made as part of project implementation, taxes and other public charges (including primarily perpetual usufruct charges and real property taxes paid throughout the construction process), finance costs incurred in relation to external financing (in accordance with IAS 16), including in particular interest on credit facilities, loans, notes and bonds, to the extent they finance expenditure on the construction of investment property, foreign exchange differences on foreign-currency denominated liabilities related to financing of investment expenditure (apart from exchange differences on borrowings), and fees related to raising financing for the investment project, any costs incurred in connection with any present or future revenue that the entity expects to generate (costs of finding tenants, costs of adapting premises to the tenants requirements that can be allocated to specific lease agreements entered into for a definite term). Subsequent to initial recognition, at least for each reporting date, investment property is measured at fair value, reflecting market conditions prevailing at the reporting date. Fair value is defined as the amount at which a property 20

22 could be exchanged in an arm s length transaction between informed and willing parties. Fair value reflects, in particular, rental income from existing rental contracts, reasonable and justified expectations of rental income from future contracts as viewed by the market, as well as reliably estimated cash inflows from investment property. Gains or losses arising from changes in the fair value of investment property are recognised in the statement of comprehensive income in the period in which they arise. Properties for which sale agreements have been concluded are measured at the selling price specified in such agreements. In all other cases, the Management Board adopts a conservative approach and determines the fair value based on the lower of the available valuation estimates, such as: estimate surveys prepared by independent expert appraisers, managerial valuations and in-house appraisals of properties. The fair value of properties is determined by independent property appraisers using valuation methods that are most appropriate to a given property. These are: 1. Income approach, investment method, discounted cash flow (DCF) model it is applied to investment property that generates variable rental income and consists in aggregating discounted cash flows for an adopted forecast period and residual value of the property, 2. Income approach, investment method, direct capitalisation model it is applied to investment property that generates fixed rental income; the value of investment property is calculated as the product of annual income that can be generated by the property and the capitalisation rate, 3. Comparison approach (pairwise comparison or average price adjustment) this approach is used to value investment property for which data on comparable property sale transactions on a given market is available as well as land and residential property. 4. Mixed approach, residual method this approach is generally used to determine the value of investment property under construction, which is calculated as the property s target value (estimated based on the income approach or comparison approach) less any capital expenditure to be incurred as at the valuation date. Estimate surveys prepared by independent expert appraisers and managerial valuations are updated at least at the end of each financial year. If at the end of any specific interim reporting period the valuations referred to above are not updated, the value of investment property increases by the amount of investment expenditure made on the property since its last valuation date, and also changes depending on the movement in the price of the euro, in which investment property is measured. The effects of fair value measurement of investment property are taken to profit or loss in the year when such measurement was made, and are presented by the Group in the operating part of its statement of profit or loss and other comprehensive income. Investment property is derecognised upon its sale or when it is permanently withdrawn from use, if no future economic benefits are expected from its sale. All gains or losses arising from sale or discontinuation of use of investment property, that is the difference between net proceeds from sale and the carrying amount of the asset, are recognised in profit or loss for the current period. Investment property and all related revenue and costs are classified into one of the Group s business segments, including Office Projects, Mixed-Use Projects, Retail Projects and the Value Added Segment. 21

23 Inventory Under inventory, the Group discloses only residential property development projects. Inventory is recognised at the lower of cost and net realisable value. Cost comprises: perpetual usufruct right or ownership title to land, construction costs related to work performed on construction sites by subcontractors, capitalised costs comprising planning and design costs, as well as other construction costs. Borrowing costs include mainly interest paid, fees and commissions, as well as foreign exchange differences on repayment of borrowings contracted to finance property development projects. The Group capitalises only those borrowings that are related to active property development or construction work stages of the investment process, in the periods covered by such work. If property development or construction work is suspended or discontinued, the borrowing costs related to the suspension period are recognised in profit or loss for the current period. Cost does not include: cost of material lost and value of work lost, cost of maintenance and holding a property after an occupancy permit has been obtained, administrative and management costs other than those relating to adaptation of inventory items, and distribution costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated costs necessary to make the sale. Changes in inventory are accounted for using the specific identification method. The cost of producing an inventory item is determined on its placement in service by dividing total production cost by the individual inventory items, taking into account the floor areas of apartments/houses in the same location. In the case of show apartments/houses, their value is additionally increased by expenditure incurred on finishing the apartment/house. Subsequent to initial recognition, at least for each reporting date, if the carrying amount of inventory is higher than its net realisable value, inventory is written down to net realisable value. Reasons for such write downs may include a decrease in market prices of apartments or houses, or damage to flats or houses. The Company examines whether a decrease in market prices occurred by obtaining information on comparable transactions executed on the market and by analysing estimate surveys prepared by independent expert appraisers, which usually rely on comparative methods to determine the market value (with the market value substantially corresponding to net realisable value). Write-downs may be reversed, in whole or in part, if it is found that the reasons due to which they were recognised have ceased to exist. Shares in subsidiaries and jointly controlled entities Investments in subsidiaries and jointly controlled entities are accounted for at cost in accordance with IAS 27. The Company tests the investments for impairment in accordance with IAS 36 at the end of each reporting period or more frequently. Impairment indications that require an impairment test to be performed for a given investment in a subsidiary or a jointly controlled entity include: - a material difference between the value of the investee recognised in the accounting records by the Company as the parent and the value of the subsidiary s or jointly controlled entity s net assets which is attributable to the Company as the parent; 22

24 - significantly lower profit or incurred loss, in particular if the loss is significantly higher than assumed in the budget, or cash flows significantly worse than assumed in the budget. In order to measure investments in subsidiaries and jointly controlled entities the Company determines the amount of future cash flows to be generated by a subsidiary or jointly controlled entity (ability to pay out dividend). The amount of future cash flows also includes proceeds from sale of shares in a given subsidiary or jointly controlled entity, if such transaction is planned in the assumed time horizon. Cash flows from financing activities and taxes are not included in future cash flows, as they are reflected in the discount rate. Estimation of an investee s ability to pay out dividend should be based on reliable and realistic assumptions as to the future performance of the investee, taking into account predictable market conditions in the foreseeable future, and the result should be discounted to the present value of future cash flows. Subsequently, the part of future cash flows to be generated by a subsidiary which is attributable to the Company as the parent is compared with the investee s value in the accounting records. In specific cases, where future cash flows to be generated by subsidiaries and jointly controlled entities are negative, in addition to the impairment loss equal to the investee s carrying amount the Company recognises a liability in the amount corresponding to the share in the investee s profit or loss that exceeds the value of its net assets. Impairment losses are recognised immediately in the statement of profit or loss under finance costs. If following an impairment test for an investment in a subsidiary and jointly controlled entity it occurs that the impairment indication no longer exists, the relevant impairment loss is reversed and the resulting gains are recognised under other finance income. Intangible assets Intangible assets are identifiable non-monetary assets without physical substance, including: economic copyrights, neighbouring rights, licences (including software licences), other permits and licences, rights to inventions, patents, trademarks, utility models and design patterns, know-how, goodwill, prepayments for intangible assets. An intangible asset may be purchased or self-created but it is recognised if and only if: 1. it is probable that future economic benefits that are attributable to the asset will flow to the Company; and 2. the cost of the asset can be measured reliably. Initially, intangible assets are measured at cost. At the end of the reporting period, intangible assets are measured at initial value less accumulated amortisation and impairment losses, if any; the initial value is: for goodwill the initial value determined in accordance with IFRS 3; for other intangible assets their cost. 23

25 On recognition of an intangible asset the Company assesses whether its useful life is finite or indefinite and, if finite, it determines the amortisation method and rate. Planned amortisation charges for intangible assets are recognised as amortisation expense and are made according to the following rules: amortisation charges are calculated using the straight-line method on a monthly basis; amortisation charges are made starting from the month following the month in which the asset is available for use, until the end of the month in which the total amortisation charges are equal to the asset s initial value, or in which the intangible asset is no longer used or is classified as held for sale in accordance with IFRS 5; amortisation charges for intangible assets are determined based on expected useful lives of the assets, intangible assets with initial unit value of less than PLN 2 thousand may be amortised on a one-off basis at the rate of 100% at the time they are placed in service. The Company applies the following useful lives for intangible assets: software licences 2 years, other intangible assets 5 years. The period and method of amortisation are reviewed in the last quarter of each financial year. Any changes are recognised under intangible assets prospectively, i.e. with effect from the first day of the next financial year. At the end of each reporting period, the Company tests intangible assets for impairment in accordance with IAS 36. If there is an indication of impairment, the Company determines the amount of impairment loss on the asset. Impairment losses are recognised immediately in the statement of profit or loss under other expenses. Goodwill and intangible assets with indefinite useful lives are not amortised. They are tested for impairment at the end of each financial year and each time when there is an indication of impairment. On disposal of an intangible asset, its initial value and accumulated amortisation are derecognised, and the amount from disposal is recognised in the statement of profit or loss under other income or other expenses. Gain or loss on disposal of an intangible asset is presented as net gain or loss. Property, plant and equipment Property, plant and equipment comprise non-current assets that are held for use in the supply of goods or services or for administrative purposes, and are expected to be used for more than one year. Property, plant and equipment include in particular: plant, equipment and other items, leasehold improvements, property, plant and equipment under construction, prepayments for property, plant and equipment under construction. Property, plant and equipment are initially recognised at cost. At the end of each reporting period, items of property, plant and equipment are carried at cost less accumulated depreciation and impairment. 24

26 Planned depreciation charges for items of property, plant and equipment are recognised as depreciation expense and are made according to the following rules: depreciation charges are calculated using the straight-line method on a monthly basis; depreciation charges are made starting from the month in which the asset is available for use, until the end of the month in which the total depreciation charges are equal to the asset s initial value, or in which the asset is no longer used or is classified as held for sale in accordance with IFRS 5; items of property, plant and equipment with initial unit values of less than PLN 2 thousand may be depreciated on a one-off basis at the rate of 100% at the time they are placed in service. The Company uses the following useful lives for property, plant and equipment: 1. leasehold improvements the useful life is determined based on the lease agreement for given premises, 2. computer hardware three years, 3. other items of property, plant and equipment based on their assumed useful lives. The period and method of depreciation are reviewed in the last quarter of each financial year. Any changes are recognised under property, plant and equipment prospectively, i.e. with effect from the first day of the next financial year. At the end of each reporting period, the Company tests items of property, plant and equipment for impairment in accordance with IAS 36. If there is an indication of impairment, the Company determines the amount of impairment loss on the asset. Impairment losses are recognised immediately in the statement of profit or loss under other expenses. On disposal of an item of property, plant and equipment, its initial value and accumulated depreciation are derecognised, and the amount from disposal is recognised in the statement of profit or loss under other income or other expenses. Gain or loss on disposal of property, plant and equipment is presented as net gain or loss. At least once every four years all items of property, plant and equipment are subject to a physical count. The count results are compared against property plant and equipment disclosed in the accounting records, and any differences are charged to other income or expenses in the period in which the count is performed. Leases Lease agreements which transfer substantially all the risks and rewards incidental to ownership of an asset to the Company are classified as finance leases. In particular, the Company classifies as a finance lease all agreements under which: the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; leased assets are of such a specialised nature that only the lessee can use them without major modifications (applicable to production plant and equipment). Finance leases are recognised as assets at the inception of the lease at the lower of the fair value of the leased asset or the present value of minimum lease payments. Property leased under finance leases is recognised under investment property and is measured in accordance with the valuation policies applicable to investment property. 25

27 The Group classifies its finance lease agreements as investment property since the leased properties are of the same nature as the Group s other properties. Minimum lease payments are divided into principal and interest using the internal rate of return (IRR) method. As at the end of each reporting period, the Company performs a valuation of investment property held under finance lease agreements in accordance with the valuation policies applicable to investment property. Gains and losses arising from their impairment are recognised in the statement of profit or loss under other expenses. A lease is classified as an operating lease if a significant portion of the risks and rewards of ownership are retained by the lessor (financing party). Lease payments under an operating lease are charged to expenses on a straight-line basis over the lease term. Other financial assets (financial instruments other than derivatives) Loans, receivables and bank deposits are recognised at the date of origination. All other financial assets (including assets measured at fair value through profit or loss) are recognised at the transaction date, on which the Company becomes a party to a mutual liability pertaining to a given financial instrument. The Company derecognises a financial asset upon the expiry of its contractual rights to cash flows from that asset or upon transfer of those rights in a transaction transferring substantially all material risks and rewards of ownership of the asset. Any interest in the transferred financial asset which is created or remains to be owned by the Company is disclosed as an asset or liability. A financial asset and a financial liability are offset and the net amount is presented in the statement of financial position when, and only when, the Company has a legally enforceable right to set off the recognised amounts or intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. The Company classifies financial instruments other than financial derivatives under the following categories: financial assets at fair value through profit or loss, financial assets held to maturity, loans and receivables, and financial assets available for sale. Financial assets at fair value through profit or loss Financial assets are classified as an investment measured at fair value through profit or loss if they are held for trading or were designated as measured at fair value through profit or loss at their initial recognition. Financial assets are designated as assets at fair value through profit or loss if the Company actively manages such investments and makes decisions concerning their purchase or sale based on their fair value. Transaction cost relating to an investment is recognised in profit or loss of the period at the time it is incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes in their fair value are recognised in profit or loss of the period. All profits or losses relating to such investments are recognised in profit or loss of the period. Financial assets at fair value through profit or loss include equity securities that would otherwise be classified as held for sale. Financial assets held to maturity If the Company intends and is able to hold debt securities to maturity, such debt securities are classified as financial assets held to maturity. Financial assets held to maturity are initially recognised at fair value plus directly attributable transaction cost. 26

28 Subsequently, financial assets held to maturity are measured at amortised cost with the use of the effective interest rate method, less impairment losses, if any. If a larger-than-insignificant amount of financial assets held to maturity is disposed of or reclassified earlier than close to their maturity, the Company reclassifies all investments held to maturity to investments available for sale and until the end of a given financial year and throughout the next two financial years the Company may not recognise purchased investments as financial assets held to maturity. Financial assets held to maturity include bonds and notes. Loans and receivables Loans and receivables are financial assets with determined or determinable payments, which are not listed on any active market. Such assets are initially recognised at fair value plus directly attributable transaction costs. Subsequently, loans and receivables are measured at amortised cost with the use of the effective interest rate method, less impairment losses, if any. The Company also discloses cash and cash equivalents, as well as trade receivables under loans and receivables. At least at the end of each financial year all financial assets, in particular loans, are reviewed in accordance with the prudent valuation principle. Indications of loan impairment include: default in scheduled payments of interest or loan repayments despite lapse of the payment date; concerns about the borrower s financial standing which may cause difficulties in repayment of the loan and interest; borrower s negative net asset value, information on the borrower entering bankruptcy proceedings. If any of the above indications occurs, the recoverable amount of the receivables should be determined, which in principle corresponds to their fair value. The difference between the carrying amount and newly determined fair value is the amount of the impairment loss. Impairment losses are recognised under finance costs in the statement of profit or loss and other comprehensive income in the period of fair value measurement. If following a measurement of receivables in a subsequent reporting period it occurs that the impairment indication no longer exists, the recognised impairment loss is reversed. The resulting gains are recognised under other finance income. Financial assets available for sale Financial assets available for sale are non-derivative financial assets that are designated as available for sale or are not classified in any of the categories of financial assets specified above. Subsequent to initial recognition, financial assets available for sale are measured at fair value, and changes in the fair value other than impairment losses and exchange differences on available-for-sale debt instruments are recognised in other comprehensive income and presented in equity as fair value reserve. When an investment is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss of the period. Financial assets available for sale include equity and debt securities. 27

29 Cash and cash equivalents Cash and cash equivalents include cash in hand, cash at bank, cash in transit, as well as bank deposits, other securities, and interest on financial assets, which are payable or due within three months from the date of their receipt, issue, purchase or placement. Domestic assets are recognised in the accounting records at nominal value during the financial year and as at the end of the reporting period. The nominal value includes interest accrued or deducted by the bank, if any. At the end of the reporting period, assets denominated in foreign currencies are translated at the mid rate quoted for a given currency by the National Bank of Poland for that date. During the year, inflows to and outflows from foreign currency accounts are measured in accordance with the following rules: completed transactions involving sale or purchase of a foreign currency are accounted for at the buy or sell rate used in the transaction, if there is no purchase or sale of a foreign currency, the inflows to and outflows from a foreign currency account are measured using the mid rate quoted by the National Bank of Poland for the day preceding the transaction date, a decrease in foreign-currency cash in foreign currency accounts and in hand is measured using the FIFO method. Trade receivables In these financial statements, receivables are classified into current and non-current. Receivables maturing in more than 12 months after the reporting date are disclosed as non-current, and those maturing sooner or held for trading are presented as current receivables. At the acquisition date or the date when a receivable otherwise arises, current receivables are recognised at their nominal amounts, i.e. their amounts as determined on the origination date. At the reporting date, receivables are measured at the amount of payment due, net of impairment losses, if any. Impairment losses on receivables are estimated as follows: on receivables from debtors that have been placed in liquidation or declared bankrupt up to the receivable amount in respect of which no guarantee or other security has been provided and which has been notified to a liquidator or judge commissioner in bankruptcy proceedings; on receivables from debtors in the case of whom a bankruptcy petition has been dismissed on the grounds that the debtor s assets are insufficient to cover the costs of the bankruptcy proceedings in the full amount of the receivable, on receivables which are questioned by debtors and which are past their due dates, where, based on an assessment of the debtor s assets and financial standing, the debtor is unlikely to pay the receivable in the full contractual amount up to the receivable amount in respect of which no guarantee or other security has been provided; on receivables which are equivalent to an increase in receivables in respect of which impairment losses have been recognised up to such amounts, until received or written off, 28

30 on receivables which are past due and in the case of which there is considerable risk that they will not be collected, as determined by the Management Board on a case-by-case basis in a reliably estimated amount; on receivables which are not past due but in the case of which there is considerable risk that they will not be collected, as determined by the Management Board on a case-by-case basis in a reliably estimated amount; in line with the prudence principle, an impairment loss equal to 100% of the value is recognised on any interest accrued on past-due receivables from customers; such impairment is recognised immediately as interest accrues and is posted in the accounting books (the impairment loss is charged to finance costs). Impairment losses on receivables are posted to other expenses or finance costs, as appropriate depending on the type of receivables concerned. Receivables that have been cancelled or have become time barred or unrecoverable reduce the amount of impairment losses previously recognised on such receivables. If no impairment losses have been recognised on such receivables or the impairment losses that have been recognised were lower than the full amount of the receivables, the receivables are charged to other expenses or finance costs, as appropriate. If the reason for an impairment loss ceases to exist, the equivalent of the amount in respect of which impairment has been recognised is added to the amount of the given receivable as well as other income or finance income, as appropriate. Impairment losses are presented in other expenses or finance costs, depending on the type of receivable that they refer to. On initial recognition, foreign-currency receivables are measured at the mid rate quoted by the NBP for the date preceding the receivable origination date (e.g. date of invoice). At the reporting date, foreign-currency receivables are measured at the mid rate quoted by the NBP for the reporting date. Deferred tax assets and liabilities Deferred tax assets and liabilities are identified and recognised using a balance-sheet approach, and are measured at the end of each quarter. Deferred tax assets are recognised for all deductible temporary differences and for tax losses carried forward and unused tax credits, to the extent it is probable that taxable income will be available in the future against which such deductible temporary differences, tax losses and tax credits can be utilised; except to the extent that the deferred tax assets related to deductible temporary differences arise from the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit before tax nor taxable income (tax loss), and in the case of deductible temporary differences arising from investments in subsidiaries or associates and interests in joint ventures, the related deferred tax assets are recognised in the statement of financial position to the extent it is probable that in the foreseeable future the temporary differences will be reversed and taxable income will be generated which will enable the deductible temporary differences to be offset. 29

31 except to the extent that the deferred tax asset arises from fair-value measurement of investment property in companies covered by the Group s restructuring plan. Such plan assumes that when an asset is realised, subject to meeting certain conditions provided in applicable laws, the relevant transactions will not be subject to taxation, and therefore the deferred tax asset will not be realised. The deferred tax asset is reviewed at each reporting date it is examined whether it is probable that taxable income will be generated against which the deductible temporary differences, tax losses and tax credits can be offset, i.e.: whether there exist sufficient taxable temporary differences in respect of which deferred tax liability has been recognised, or whether it is probable that sufficient income will be generated to allow the deductible temporary differences, tax losses and tax credits to be offset (generation of sufficient income is deemed to be probable if so provided in the budgets for the following years). Deferred tax liability is recognised for taxable temporary differences: except to the extent that the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and, at the time of the transaction, affects neither accounting profit before tax nor taxable income (tax loss), and in the case of taxable temporary differences associated with investments in subsidiaries or associates and interests in joint ventures, unless the investor is able to control the timing of reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future, except to the extent that the deferred tax liability arises from fair-value measurement of investment property in companies covered by the Group s restructuring plan. Such plan assumes that when an asset is realised, subject to meeting certain conditions provided in applicable laws, the relevant transactions will not be subject to taxation, and therefore the deferred tax liability will not be realised. The carrying amount of deferred tax liabilities is reviewed at each reporting date and is subject to appropriate reduction to the extent that a tax liability is no longer likely to arise. Deferred tax assets and deferred tax liabilities are calculated using tax rates expected to be effective at the time of realisation of particular asset or liability, based on tax rates (and tax legislation) effective at the reporting date or tax rates (and tax legislation) which at the reporting date are certain to be effective in the future. The Group offsets deferred tax assets against deferred tax liabilities only if it holds an enforceable title to offset current tax assets against current tax payables, and the Group expects that realisation of deferred tax assets and liabilities related to the same item will occur at the same time. The Group offsets deferred tax related to income and costs from revaluation of investment property, financial instruments and other receivables and payables. Deferred tax assets and liabilities are recognised in accounting records by posting, at the end of the reporting period, only the change in the balances of the deferred tax assets and deferred tax liabilities as determined at the end and beginning of the reporting period. If any recognised deferred tax assets or deferred tax liabilities relate to business transactions whose outcome affects net profit or loss, then such deferred tax assets or liabilities are recognised in correspondence with profit or loss. Deferred tax assets and deferred tax liabilities related to transactions which are charged to equity are also taken to equity rather than to profit or loss. 30

32 Where IAS 12 so requires, deferred tax is disclosed as an adjustment to goodwill. Accruals and deferrals Prepayments include costs that can be attributed to more than one reporting period. Prepayments include such items as: prepaid costs of goods and services to be received in future periods, such as subscriptions, insurance premiums, rents or leases accounted for on a straight-line basis; prepaid costs of electricity, gas, transport or utility services accounted for on a straight-line basis; initial fees paid upon execution of lease agreements accounted for on a straight-line basis over the lease term; costs of major renovations and repairs accounted for on a straight-line basis over periods of one to three years, depending on the decision of the Company s Management Board; real property tax, annual charges for perpetual usufruct of land accounted for on a straight-line basis; transfer of the excess of the costs of construction services in progress, as determined at the reporting date, over the costs of such services that are commensurate with revenue accounted for in accordance with the principles applicable to accounting for construction services; share issue costs until the issue date accounted for on the issue date. Under the straight-line method the cost items listed above are accounted for over time. At least at the end of each financial year, all items of prepayments and deferred income are reviewed to ensure whether they are still justified. All assets that cannot be directly attributed to revenue of future reporting periods should be charged to current profit or loss. Accrued expenses include: costs of performance of construction contracts in progress, as referred to in IAS 11 Construction Contracts; liabilities under uninvoiced deliveries and services received by the Company; however, in the financial statements such items are recognised under trade payables, also when the Company may be required to use estimates to determine the exact quantity and/or price of deliveries/services. Deferred income includes: prepayments and advances received for work or services to be performed in subsequent reporting periods; payments received or receivables invoiced in advance for work or services to be performed in subsequent reporting periods including mainly prepaid rents or lease payments received as well as other prepayments received, accounted for in equal monthly instalments over the term of the agreement; contractual penalties not yet received and compensation sought in court proceedings charged to other income at the time the income is received. Equity Equity is measured at nominal amounts. Share capital is disclosed in the amount specified in the Articles of Association and resolutions on an increase / cancellation of share capital, entered in a relevant court register. Until a share capital increase is registered, the 31

33 amounts contributed by shareholders are recognised in the accounting records as settlements, and are presented in financial statements as other capital reserves. Any difference between the fair value of consideration received and the par value of shares is recognised in statutory reserve funds under share premium account. Share issue costs incurred upon establishment of a joint-stock company or share capital increase reduce statutory reserve funds up to the amount of the excess of the issue proceeds over the par value of shares. Other capital reserves mainly include capital from the settlement of the acquisition of Art Norblin shares and capital from measurement of the incentive scheme (compensation in the form of shares in the Parent). Share-based payments Incentive Scheme The fair value of an option to subscribe for Capital Park S.A. shares is recognised under costs of salaries and wages with a corresponding increase in equity. The fair value is determined as at the date of share option grant to eligible persons and recognised over the vesting period. The amount charged to costs is adjusted to reflect the current number of options granted for which the conditions of employment and non-market vesting conditions are met. In the case of share-based payment conditions other than vesting conditions, the fair value of awards granted as share-based payments is measured in such a way as to reflect such other conditions but is not remeasured if there are differences between expected and actual results. The amount of the liability is reviewed at the end of each reporting period and at the date of settlement. Changes in the fair value of the liability are recognised as personnel costs in profit or loss of the period. In addition to prior years profits and losses, retained earnings also include the effect of material prior year errors. A material prior year error is an error as a result of which any of the following conditions is met: profit before tax deviates by more than 10% and total assets deviate by more than 1%, profit before tax deviates by more than 10% and net revenue deviates by more than 1%. The Company corrects material prior period errors and restates relevant data retrospectively, where practicable. Correction of a material prior year error is recognised on a net basis, i.e. after accounting for the effect of the error on tax liabilities (both current and deferred). Prior years profits, including profits that were allocated to statutory reserve funds and reserve capital, may be paid out to shareholders as dividend only after any prior years losses are covered and provided that the minimum amount of the statutory reserve fund is reached, i.e. one-third of the share capital, as specified for joint stock companies in the Commercial Companies Code. Financial liabilities other than derivative instruments The Group recognises subordinated liabilities and liabilities under outstanding debt securities at the date on which they arise. All other financial liabilities, including liabilities at fair value through profit or loss, are recognised at the trade date, or the date on which the Group becomes party to an agreement under which it is obliged to deliver the financial instrument. Upon initial recognition, the Company measures financial liabilities at fair value adjusted for transaction costs which may be directly attributed to the acquisition or issue of a given financial liability. The Group derecognises a financial liability when it has been repaid or cancelled or becomes time barred. 32

34 Derivative financial instruments The Group uses derivative financial instruments to hedge its currency and interest rate risk exposure. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the hybrid (combined) instrument is not measured at fair value through profit or loss. On initial designation of a derivative financial instrument as a hedging instrument, each Group company formally documents the relationship between the hedging instrument and the hedged item. The relevant documentation describes the risk management objective, a strategy for undertaking the hedge and the hedged risk, as well as methods to be used by each Group company to assess the hedging instrument s effectiveness. Each Group company makes an assessment, both at the time when a hedge is undertaken and in subsequent periods, whether it is justified to expect that the hedging instruments will remain highly effective in offsetting changes in fair value or cash flows of the respective hedged items attributable to the hedged risk, as well as whether actual results are within a range of %. Cash flow hedges of future transactions are applied to highly probable future transactions bearing risk of changes in cash flows whose effects would be recognised in profit or loss of the period. Derivative financial instruments are initially recognised at fair value. Transaction costs are recognised in profit or loss of the period at the time they are incurred. Subsequent to initial recognition, the Company measures derivative financial instruments at fair value, with gains and losses arising from changes in fair value recognised in finance income or costs, or as an increase in investment property if the derivative is used to hedge cash flows relating to selfconstructed investment property. Provisions Provisions under IAS 37 are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and the amount of the obligation can be reliably estimated. If the Group anticipates that the costs for which provisions have been recognised will be recovered, e.g. under an insurance agreement, the recovery of such costs is recognised as a separate asset, but only when it is practically certain to occur. Provisions are recognised based on reliable estimates made by the Management Board of each Group company. At each reporting date, the Company verifies the validity and the amount of provisions. Recognised or increased provisions are charged to costs of core operations, finance costs or capital expenditure on property or inventory, depending on what circumstances the future obligation relates to. Provisions are used when the liability for which the provision has been recognised arises; use of provisions is accounted for as a decrease in the provision amount and an increase in the liability amount. A provision may be used solely for the purpose for which it has been recognised. If the risk for which a provision has been recognised decreases or ceases to exist, unused provisions reduce costs of core operations or increase other income or finance income (depending on the cost category to which the provision was charged) at the date on which it is determined that the provision is no longer necessary. Provisions are recognised for: 1. restructuring and liquidation the provision is based on expenditure inextricably related to restructuring but unrelated to the Company s day-to-day activities; for instance, the provision may include severance 33

35 payments and compensation under labour law or costs of liquidation of businesses covered by restructuring, such as costs or losses under penalties or compensation for cancellation or non-performance of executed contracts; a restructuring provision does not include costs related to future operations, including costs of marketing, training of remaining staff, changing remaining staff members job assignments, implementing new systems and distribution networks, etc. Restructuring provisions are charged to other expenses; 2. guarantees and sureties issued the need to recognise a provision is assessed based on the analysis of whether the entity to which the guarantee or surety has been granted is likely to continue to perform the obligations secured by the guarantee or surety; if the entity to which the guarantee or surety has been granted is in poor condition, the provision amount will depend on the Company s expectations regarding the likelihood of the liability being paid by the entity; the issue of a guarantee or surety is not a basis for recognition of a provision, but it requires recognition of a contingent liability; 3. results of court proceeding the need to recognise a provision is assessed based on the progress of the proceedings or opinions of legal advisers; when determining the provision amount, the Company should account not only for the claim defined in the statement of claim, but also for the cost of litigation; 4. expected losses on executed contracts. Trade payables and other liabilities In these financial statements, liabilities are classified into current and non-current. Liabilities maturing in more than 12 months after the reporting date are disclosed as non-current, and those maturing sooner or held for trading are presented as current liabilities. Current liabilities, including current trade payables, liabilities under salaries and wages and public charges are measured at amounts payable at the reporting date. The amount payable accounts for the obligation to accrue interest, for instance default interest, payable at the reporting date. At the date when a liability arises, current liabilities are recognised at their nominal amount, i.e. their amount as determined on the origination date. On initial recognition, foreign-currency liabilities are measured at the mid rate quoted by the NBP for the date preceding the liability origination date (e.g. date of invoice). At the reporting date, foreign-currency liabilities are measured at the mid rate quoted by the NBP for the reporting date. Other liabilities include chiefly rental deposits (security for rental contracts), retainages from general contractors (performance bonds and security deposits where no performance bond is provided), taxes payable, as well as liabilities under received prepayments, which are to be settled by delivery of merchandise and tangible assets, or performance of services. Operating income Revenue represents the inflow of economic benefits during a given period, arising in the ordinary course of the Group s business and resulting in an increase in equity other than through contributions by the shareholders. The Group classifies the following items as revenue from operating activities: income from the lease of office and retail space, including compensations received from tenants on early terminations of the rental agreements as well as income from recharge invoices and service charges (which 34

36 are payable by tenants to cover the cost of using the properties and the cost of services provided by the Group companies under rental agreements). gains on disposal of investment property, apartments and houses, income from the management of property and investment portfolio. The Group presents its rental income based on the average rent for the rental agreement term, which means that any changes in the rent rate during the rental term (rent free periods) are recognised on an accrual basis. Revenue is measured at fair value of the consideration received or receivable, net of VAT and discounts, if any. Sales revenue is recognised in accounting records at the time it is due and payable under the terms of the relevant lease contracts. In the case of sale of apartments or houses, revenue is deemed earned when: the entire price has been paid, or all the risks and rewards incidental to the possession of the asset being sold have been transferred to the buyer, which usually takes place upon execution of a notarial deed or a hand-over report. Operating expenses The Group classifies the following items as operating expenses: costs of operating the office and retail properties and direct property operating expenses, which include primarily the following items: cost of utility services and other materials; cleaning and security services; costs of property management and technical support services; charges payable to housing cooperatives or commonhold associations; real estate taxes and perpetual usufruct charges; insurances; as well as remuneration of staff employed directly on the properties; costs of operating the special purpose vehicles, which include costs of salaries and administrative expenses associated with the SPVs existence as business entities, as well as other operating expenses unrelated to the properties as such; general and administrative expenses, which include costs of salaries and administrative expenses such as consultancy costs, office expenses, legal costs, commissions, depreciation of property, plant and equipment of the parent Capital Park S.A. and of CP Management Sp. z o.o. as the entity providing support services to other Group companies; cost of renovations and repairs of property, distribution costs; cost of valuation of the share-option plan for the Management Board members, gains/losses on investment property revaluation and write-downs on inventories, comprising primarily gains and losses on remeasurement of fair value of investment properties, which reflect changes in their fair value in a given period. The share of net profits/losses of equity-accounted entities reflects the results generated in the reporting period by the entities disclosed in the consolidated financial statements as joint ventures, which are attributable to the Group's interests in those entities. 35

37 Determination of net operating profit from core operations Net operating profit is calculated as rental income from completed properties less direct property operating expenses. Operating profit is calculated as net operating profit plus items of other income items and less items of other expenses. The Group s profit or loss is closely linked to price movements in property markets, which are driven by rent levels, occupancy rates, changes in yields, changes in interest rates, construction costs, availability of bank financing, EUR/PLN exchange rates, and overall credit market conditions. Finance income and costs Interest income and expense are accounted for using the accrual method. Other finance income and costs consist mainly of realised and unrealised foreign exchange differences arising in connection with repayment and measurement of financial liabilities. Borrowing costs are charged to expenses as incurred, except for costs related to production (construction) or acquisition of assets. Such borrowing costs are capitalised, provided that it is probable that they will generate economic benefits in the future. Borrowing costs are capitalised under investment property or inventory, depending on the type of the property. Current income tax Current tax payable and current tax assets for the current period and for previous periods are measured at the amounts expected to be paid to (or recovered from) tax authorities. Dividend payment Dividends are recognised when the shareholder s right to receive payment is established. Format of statement of cash flows The statement of cash flows is prepared using the indirect method. The indirect method consists in adjusting profit or loss for: results of non-monetary transactions such as changes in the balance of receivables and liabilities, accruals and deferrals, amortisation and depreciation, and foreign-exchange gains and losses cash inflows and outflows from investing and financing activities. The Group shows its cash flows broken into: operating activities presenting cash inflows from and outflows on the Group s core operations, as well as any other cash flows which are not classified in any of the activities listed below, investing activities presenting cash inflows from and outflows on acquisition and sale of non-current and current investments other than cash, as well as all inflows and outflows related to operations in the residential business segment, financing activities presenting changes in the amount and structure of the Group s equity and debt. 36

38 Operating activities Cash flows from operating activities originate chiefly in the Group s core revenue-generating operations. The cash flows are derived from transactions and other events which are taken into account when calculating the Group s profit or loss, such as: cash from sale of services and re-invoicing of costs to tenants, cash paid for supplies of goods and services, taxes received and paid, including income tax, employee benefits paid, other inflows and outflows related to the Group s core operations. Investment activities Cash from (or used in) investing activities represents expenditure which will generate revenue and cash in the future, as well as cash from disposal of assets whose useful lives were longer than the standard lifecycle of the services rendered by the Group companies. This includes in particular the cash effect of the following types of transactions: inflows and outflows relating of acquisition or disposal of subsidiaries or their business units, cash and cash equivalents of subsidiaries acquired or disposed of, inflows and outflows relating to acquisition and disposal of property, plant and equipment and intangible assets, including prepayments, inflows and outflows relating to acquisition and disposal of investments in property, including prepayments, inflows and outflows relating to acquisition and disposal of investments in residential property, including prepayments, cash received and paid in connection with realisation of financial instruments, except where realisation of a financial instrument is closely related to operating or financial activities, proceeds from cash deposited in bank accounts. Financing activities Cash flows from financing activities represent inflows and outflows relating to the financing of the Group s operations, which serve to estimate future cash flows of entities supplying the Group with capital. Cash flows from financing activities include in particular: proceeds from issues of shares or other financial instruments, cash paid to shareholders as share in profit and equity, proceeds from and repayment of bank and non-bank borrowings, issued bonds, and other securities, lease payments made. 6.5 AMENDMENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS The accounting policies applied to prepare the H financial statements were consistent with the policies applied to draw up the 2014 financial statements, except for the following new or amended standards and interpretations endorsed by the European Union and effective for annual periods beginning on or after January 1st 2015: Annual Improvements ( cycle) amendments to IFRS introduced as part of an annual improvements cycle, 37

39 Annual Improvements ( cycle) amendments to IFRS introduced as part of an annual improvements cycle, Amendments to IAS 19 Defined Benefit Plans: Employee Contributions. In 2015, the Company adopted all the new and approved standards and interpretations issued by the International Accounting Standards Board and the Interpretations Committee and endorsed by the EU, which apply to the Company s business and are effective for reporting periods beginning on or after January 1st The application of the amendments to standards has not caused any changes in the accounting policies of the Group or in the presentation of data in its consolidated financial statements. As at the date of these interim condensed consolidated financial statements, the Group did not apply the following standards, amendments and interpretations which have been published and endorsed for application in the EU but have not yet become effective: Standards and Interpretations adopted by the IASB, but not yet endorsed by the EU: a) IFRS 9 Financial Instruments (issued on February 24th 2014) effective for reporting periods beginning on or after January 1st 2018 The new standard replaces the guidance contained in IAS 39 Financial Instruments: Recognition and Measurement, regarding classification and measurement of financial assets. The standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivables. Financial assets will be classified into one of two categories on initial recognition: - financial assets measured at amortised cost, or - financial assets at fair value. A financial asset that meets the following two conditions can be measured at amortised cost: the objective of the entity s business model is to hold the financial asset to collect the contractual cash flows, and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. Gains and losses on remeasurement of financial assets measured at fair value are recognised in profit or loss for the reporting period, except for an investment in an equity instrument which is not held for trading. IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other comprehensive income (OCI). Such election is irrevocable. The election is available on an individual instrument-by-instrument basis. No amount recognised in OCI may be ever reclassified to profit or loss at a later date. b) Annual Improvements ( cycle) amendments to IFRS introduced as part of an annual improvements cycle effective for reporting periods beginning on or after July 1st 2016 c) IFRS 14 Regulatory Deferral Accounts effective for reporting periods beginning on or after January 1st 2016 The standard was published as part of a larger project entitled Rate-Regulated Activities, which focuses on the comparability of financial statements of entities operating in areas subject to rate regulation by specific 38

40 regulatory or supervisory bodies (depending on the jurisdiction, such areas often include electricity and heat distribution, electricity and gas sales, telecom services etc.). Rather than addressing a wide range of issues related to accounting policies applicable to rate-regulated activities, IFRS 14 defines only the rules governing disclosure of balances of income or expense accounts that would not be recognised as an asset or liability in accordance with other IFRSs but that qualify for deferral in line with regulations on rate control. IFRS 14 may be applied if an entity conducts rate-regulated activities and has recognised amounts that meet the definition of regulatory deferral account balances in its financial statements prepared in accordance with previous accounting policies. Under IFRS 14, such items should be disclosed in a separate item of assets or liabilities in the statement of financial position. These items are not classified as current or non-current and are not referred to as assets or liabilities. Consequently, deferral accounts presented under assets should be disclosed as deferral account debit balances, whereas accounts under liabilities as deferral account credit balances. The entities should disclose net movements in those balances in profit or loss or other comprehensive income, separately in other comprehensive income and in profit or loss (or in the separate statement of profit or loss). d) IFRS 15 Revenue from Contracts with Customers effective for reporting periods beginning on or after January 1st 2018 IFRS 15 specifies how and when an entity should recognise revenue and requires IFRS reporters to provide relevant disclosures. The standard provides a single, principles based five-step model to be applied for recognition of revenue under all contracts with customers. e) Amendments to IAS 16 Property, Plant and Equipment, and IAS 41 Agriculture: Bearer Plants effective for reporting periods beginning on or after January 1st 2016 The amendment calls that bearer plants, currently regulated under IAS 41 Agriculture, be recognised in line with IAS 16 Property Plant and Equipment, i.e. measured at cost or at revaluation. Under IAS 41, all biological assets used in agriculture are measured at fair value less estimated costs to sell. f) Amendments to IAS 16 Property, Plant and Equipment, and IAS 38 Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortisation effective for reporting periods beginning on or after January 1st 2016 The amendments restate that the method used to depreciate property, plant and equipment should reflect the pattern in which the asset s economic benefits are consumed by the enterprise. The amendments to IAS 16 also clarify that the revenue-based method (with depreciation charges recognised proportionately to revenue generated by the entity using the tangible asset) is not correct. The IASB argues that revenue is affected by a number of factors, including inflation, which is in no way connected to the manner of consumption of economic benefits related to property, plant and equipment. 39

41 As regards intangible assets (amendments to IAS 38), it was decided that in some circumstances the application of revenue-based amortisation is warranted. This may be the case if the entity proves that there is a direct correlation between revenue and consumption of economic benefits produced by the asset and if, at the same time, the asset is a right to collect a given amount of revenue (and will expire once the entity has reached that amount). One example of such an asset is a licence to mine gold until a given revenue is generated. g) Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations effective for reporting periods beginning on or after January 1st 2016 The amendments introduce additional guidelines for acquisitions of shares in join operations which constitute businesses, as defined in IFRS 3. IFRS 11 clarifies that in such circumstances the entity should, to the extent of its participation in the joint operation, apply the principles defined in IFRS 3 Business Combinations (and other IFRSs which are not contrary to IFRS 11) and disclose information required in relation to such combinations. More detailed guidelines concerning recognition of goodwill, impairment tests, etc., are presented in part B of the standard. h) Amendments to IAS 1 Presentation of Financial Statements effective for reporting periods beginning on or after January 1st 2016 The purpose of the amendments is to encourage entities to use professional judgement in determining which information is subject to disclosure in an entity s financial statements and where and in what order such disclosures should be presented in the financial statements. i) Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 28 Investments in Associates and Joint Ventures effective for reporting periods beginning on or after January 1st 2016 The amendments apply to investment entities: applying the consolidation exception. They also present guidance on accounting for investment entities. j) Amendments to IAS 27 Separate Financial Statements effective for reporting periods beginning on or after January 1st 2016 The amendments relate to the application of the equity method in an entity s separate financial statements. They reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates. k) Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures effective for reporting periods beginning on or after January 1st 2016 delayed The amendments concern sale or contribution of assets between an investor and its associate or joint venture and clarify that the recognition of any gain or loss arising from a transaction between an investor and its associate or joint venture depends on whether the assets sold or contributed constitute a business. 40

42 The Group s Management Board is currently analysing the effect of the above standards, interpretations and amendments to standards on the Group s financial statements. 6.6 FUNCTIONAL CURRENCY AND PRESENTATION CURRENCY Items of these interim condensed consolidated financial statements are measured in the currency of the primary economic environment in which the Group operates ( functional currency ). These interim condensed consolidated financial statements are presented in the Polish złoty (PLN), which is the functional currency and presentation currency of the Group. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction dates. Any currency exchange gains or losses arising on settlement of such transactions or on balancesheet measurement of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 6.7 MATERIAL ESTIMATES AND JUDGEMENTS While preparing these interim condensed consolidated financial statements, the Parent s Management Board has to make certain estimates and judgements, which affect the values and manner of presentation of items disclosed in the financial statements. The majority of estimates are based on analyses of the market conditions, as well as the laws and tax regulations effective in a given financial period. While the adopted assumptions, estimates and judgements are based on the Management Board s best knowledge, actual figures may differ from forecasts, particularly in the event of any changes in the market, legal or tax environment. The estimates and related assumptions are reviewed and any resulting changes are disclosed in the period in which they are made, or in the current and future periods if a change in estimate affects both current and future periods. 6.8 MANAGEMENT BOARD S MATERIAL ESTIMATES AND ASSUMPTIONS Assumption of having control of REIA FIZ AN despite holding a minority interest, i.e. 15% of investment certificates For assumptions made in determining whether the entity controls REIA FIZ AN, see Note Fair value disclosure of investment property A property is classified as investment property upon initial recognition, based on a decision made by the Group s Management Board reflecting the assumptions as to the manner in which a given property will be used. Investment property is recognised as an asset if it is probable that the future economic benefits associated with the investment property will flow to the entity and the cost of the investment property can be measured reliably. Investment property is measured at fair value, reflecting market conditions prevailing at the reporting date. Fair value is defined as the amount at which a property could be exchanged in an arm s length transaction between informed and willing parties. Fair value reflects, in particular, rental income from existing lease contracts, reasonable and justified expectations of rental income from future contracts as viewed by the market, as well as reliably estimated cash outflows on the investment property. The fair value of properties is determined by independent property appraisers using valuation methods that are most appropriate to a given property. For the manner of determining the fair value of investment property, see Note 1. 41

43 Notwithstanding the professional nature of investment property valuation methodologies, any adopted assumptions are largely subjective as they refer to future (and therefore uncertain) events. The Group s Management Board seeks to determine property value in line with the prudence principle, which means that from among a wide range of data taken as the basis for a valuation the most pessimistic and the most optimistic data is eliminated. The Management Board closely monitors the economic situation in Poland and abroad. Changes in the market environment strongly affect the value of the Group s properties. Investment property is sensitive to many factors, in particular to changes in yields and EUR/PLN exchange rate, because in large part investment property valuations are based on EUR-denominated rents. An increase/decrease in the EUR/PLN exchange rate is reflected directly in higher/lower value of a given property expressed in PLN, resulting in a gain/loss on investment property revaluation. For information on the effect of foreign exchange movements on the property value, see Note 16. Deferred tax on investment property revaluation The Group does not recognise deferred tax assets and liabilities in respect of differences between the carrying amounts and tax bases of those properties which represent the Group s investments that the Group plans to exit by selling shares in the companies holding the properties. Should the Group fail to effect such transactions on the expected terms and conditions, the Group would be required to recognise a deferred tax of up to PLN 42,852 thousand, which would reduce its net assets as at June 30th 2015 by that amount. 42

44 7. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note1. INVESTMENT PROPERTY Investment property is the property owned or held in usufruct by the Group, or property leased/used by the Group under finance lease agreements. In accordance with IAS 40, all properties are measured at fair value. Changes in the value of the properties are strictly a function of movements in the EUR/PLN exchange rate. As at December 31st 2014, the EUR/PLN exchange rate stood at , whereas as at June 30th 2015 it was This decrease, translating into a more than PLN 26m loss on valuation of property (2% decrease in the exchange rate vs property value of PLN 1.7bn), was due to the fact that the value of investment properties is predominantly measured in the euro as the rents on which such measurement is based are also denominated in the euro. The Group s portfolio is divided into business segments, which comprise the following four core sectors: (i) office, (ii) mixed-use, (iii) retail, and (iv) value added. Type of project Number of projects Interest value as at Jun Jun Dec Office 6 42% 718, ,662 Mixed-use 4 36% 617, ,947 Retail 47 17% 281, ,490 Other 11 5% 89,330 91, % 1,706,977 1,595,986 Jun Dec Gross carrying amount at beginning of period 1,595,986 1,321,653 Increase, including: 148, ,165 purchase of investment property 0 26,938 capitalisation of subsequent expenditure 1 148, ,227 net profit from property revaluation at fair value 0 0 Decrease, including: (37,646) (53,832) sale of investment property 0 (3,335) net loss from property revaluation at fair value (37,646) (50,497) Gross carrying amount at end of period [PLN 000] 1,706,977 1,595,986 Gross carrying amount at end of period [EUR 000] 406, ,442 1 Such capitalised expenditure primarily includes: construction costs, costs of architectural design, costs of advisory services, financing costs (interest on borrowings and notes, fees and commissions, foreign exchange differences on interest on liabilities denominated in foreign currencies), legal costs, taxes and other charges (mainly perpetual usufruct charges and real property taxes payable during the construction period), costs incurred in connection with any present or future income planned to be generated by the companies (costs of tenant acquisition and costs of adapting the rented space to tenants requirements, which can be attributed to specific rental contracts executed for a specific period), and costs of auxiliary services charged from the SPVs by CP Management Sp. z o.o., a Group company, for managing property development projects. The value of auxiliary services charged to investment property is calculated based on the costs directly attributable to investment projects. The actual costs attributable to investment projects are accounted for at the end of each financial year. In the course of the year, the value of auxiliary services is estimated based on approximate cost data. 43

45 Under finance lease agreements, the Group uses properties owned by the lessor as the financing entity. Therefore, the Group s rights with respect to the properties are limited. At the reporting date, the Group held three properties under finance lease agreements, with a value of PLN 68,880 thousand. Disclosures in accordance with IFRS 13 (based on significant unobservable inputs, Level 3) These disclosures are made to make it easier for the readers of these financial statements to analyse the assumptions adopted in determining the fair value of investment property. Acting in accordance with the guidelines set forth in IFRS 13, the Group s Management Board performed an analysis of the methodology applied to determine the fair value of investment properties as at June 30th 2015 and December 31st 2014, and arrived at a conclusion that the methodology was based on level 3 of the fair value measurement hierarchy: there were no current transactions with similar terms and the valuation of investment property was made in reliance on a number of assumptions which had a material impact on the final determination of the fair value. The fair value of properties is determined by independent property appraisers using valuation methods that are most appropriate to a given property. These are: Income approach, investment method, discounted cash flow (DCF) model This approach is used mainly for valuation of completed commercial property projects. The discounted cash flow method involves discounting of a series of cash flows the real property is expected to generate in an assumed forecast period, which is ten years for the purpose of this analysis. Discounted residual value of the real property is added to the discounted cash flows. Properties valued using the above method jointly account for 49% of the Group s investment property portfolio and are worth in total PLN 840,498 thousand. Below are presented the key assumptions used in the calculation of the fair value of this category of real property: Name Location Status Eurocentrum Office Complex Phase 1 Beta, Gamma Total area (thousand m2) Annual NOI (PLN 000) Yield Carrying amount at Jun (PLN 000) Warsaw completed 43 27, % 404,541 Eurocentrum Alfa Warsaw completed 14 7, % 104,600 Racławicka Point Warsaw completed 2 2, % 32,036 Sobieskiego 104 Warsaw completed 4 2, % 34,226 Vis à Vis Radom Radom completed 4 2, % 31,173 Vis à Vis Łódź Łódź completed 6 3, % 37,959 Toruń, Szosa Lubicka Toruń completed 3 1, % 19,126 Mixed approach, residual method This approach is generally used to determine the value of investment property under construction, which is calculated as the property s target value (estimated based on the income approach or comparison approach) less any capital expenditure to be incurred as at the valuation date. It is used for valuation of properties where the investment process has not been completed, including retail, office and mixed retail-office properties. The target value, i.e. after 44

46 completion of the development project, was determined based on the income approach, using the investment method, direct capitalisation model. Properties valued using the above method jointly account for 45% of the Group s investment property portfolio and are worth in total PLN 767,484 thousand. Below are presented the key assumptions used in the calculation of the fair value of this category of real property: Name Location Status Total area (thousand m2) Annual NOI (PLN 000) Yield Carrying amount at Jun (PLN 000) ArtN Warsaw In pipeline 65 63, % 260,449 Royal Wilanów Eurocentrum Office Complex Phase 2 Delta Warsaw Warsaw under construction under construction 37 28, % 302, , % 165,118 Piano House Gdańsk In pipeline 5 3, % 8,909 Topos Kraków under construction % 3,261 Income approach, investment method, direct capitalisation model It is applied to investment property that generates fixed lease income or does not generate lease income due to the lack of tenants. The value of investment property is calculated as the product of annual income that can be generated by the property and the capitalisation rate. Properties valued using the above method jointly account for 1% of the Group s investment property portfolio and are worth in total PLN 14,509 thousand. Comparison approach (pairwise comparison or average price adjustment) This approach is used to value investment property for which data on comparable property sale transactions on a given market is available as well as land and residential property. Valuation of these types of property involves an analysis of similar properties which are being sold on the market and for which the characteristics that determine the purchase price and the terms of the transactions are known. Since very few comparable transactions are executed on the market and the prices of such transactions differ widely, the valuation was performed using the pairwise comparison method. The Group uses this approach mainly to value undeveloped properties or developed properties with unspecified use, on which no capital expenditure has been made, and to value apartments for resale. Properties valued using the above method jointly account for 5% of the Group s investment property portfolio and are worth in total PLN 84,486 thousand. 45

47 Note2. OTHER NON-CURRENT FINANCIAL ASSETS Non-current investments Jun Dec Interest in the Patron Wilanów joint venture 15,134 12,098 Interest in the Oberhausen joint venture 0 0 Valuation of derivative financial instruments 0 7,824 15,134 19,922 The change in derivative financial instrument valuation assets is attributable to the reclassification of those assets into current assets as at June 30th 2015, in accordance with the forward contract maturity date, which falls within 12 months of the reporting date. The Group presents interests in joint ventures that are accounted for using the equity method. The carrying amount of joint ventures comprises the value of interests in such joint ventures and loans advanced to such joint ventures, plus accrued interest and less impairment losses. The Group presents interests in joint ventures on a net basis, i.e. less liabilities related to participation in the joint ventures, which equal the estimated future cash flows related to coverage of losses on joint ventures. The table below presents details of the valuation of interests in joint ventures and general information on the agreement concluded, as well as key financial data. Interest in the Patron Wilanów joint venture Jun Dec Interest value 6,637 6,637 Impairment losses on interests (6,637) (6,637) Non-current loans advanced 29,453 28,780 Impairment losses on loans (4,000) (4,000) Liabilities related to estimated future cash flows (10,319) (12,682) 15,134 12,098 Interest in the Oberhausen joint venture Jun Dec Interest value 5 0 Impairment losses on interests (5) 0 Non-current loans advanced Impairment losses on loans (303) 0 Liabilities related to estimated future cash flows The table below presents key information on the agreements classified as joint ventures. 46

48 Patron Wilanów Group Oberhausen Jointly-controlled entities Patron Wilanów S. a r. l. of Luxembourg and its subsidiaries: Rezydencje Pałacowa Sp. z o.o. and RM 1 Sp. z o.o. Oberhausen Sp. z o.o. % interest in share capital and profit/loss 50% interests in the share capital of Patron Wilanów S. a r.l. (held directly), as well as Rezydencje Pałacowa Sp. z o.o. and RM 1 Sp. z o.o. (held indirectly); 64% share of profit/loss 53% interest in the share capital of Oberhausen SP. z o.o.; 53% share of profit/loss General information on the agreement Agreement executed on August 13th 2008 with Real Management Sp. z o.o. The agreement provides for the construction, sale and management of residential and commercial properties located in the Wilanów area. Agreement executed on April 1st 2015 with Galaxy Sp. z o.o. The agreement provides for the reconstruction and management of a shopping centre located Gdańsk. The table below presents the key financial figures of jointly-controlled entities classified as joint ventures. Patron Wilanów Group Oberhausen Key financial figures Jun Dec Jun Dec * Assets of entity/entities 76,543 79,600 51,975 - Liabilities of entity/entities 100,026 99,415 52,966 - Equity of entity/entities (23,483) (19,815) (992) - Net profit/loss of entity/entities for the reporting period 3,693 (17,601) (990) - No comparative data available. The Group acquired an interest in the entity on April 1st Note3. OTHER NON-CURRENT ASSETS Jun Dec Property, plant and equipment Non-current prepayments and accrued income Intangible assets , In the reporting period, the Group held property, plant and equipment classified as buildings and structures, plant and equipment, and other property, plant and equipment. The Group did not recognise any impairment loss on property, plant and equipment. All property, plant and equipment are owned by the Group and there are no restrictions on their use. In the period covered by these consolidated financial statements, the Group held intangible assets classified as software and other. The Group did not recognise any impairment loss on intangible assets. 47

49 Note4. INVENTORIES Under inventory the Group discloses four residential projects, whose total value as at June 30th 2015 was PLN 18,771thousand (December 31st 2014: PLN 24,452 thousand). The change in inventory relative to the end of 2014 chiefly results from the recognition of impairment losses on the residential properties in Kraków and Grudziądz. Jun Dec Carrying amount at beginning of period 24,452 33,733 Increase, including: Capital expenditure Decrease, including: Sale of apartments and houses (5,988) (9,646) 0 (5,021) Impairment losses (5,988) (4,625) Carrying amount at end of period 18,771 24,452 Note5. OTHER RECEIVABLES AND OTHER CURRENT ASSETS Jun Dec Receivables from the government 13,507 6,124 Current prepayments and accrued income 3, Other receivables 537 3,377 Prepayments for property 5,848 5,848 23,817 16,149 Under receivables from the government the Group mainly discloses VAT receivables which the Group companies recover on an ongoing basis in the course of their investment activities. Current prepayments and accrued income Jun Dec Prepaid auxiliary services Costs of on-going projects 72 0 Accrued income Other prepayments and accrued income, including taxes 3, , Note6. TRADE RECEIVABLES Jun Dec Trade receivables (gross) 5,505 6,352 Impairment losses (419) (419) Trade receivables (net) 5,086 5,933 48

50 Ageing analysis of trade receivables as at June 30th 2015 and December 31st 2014: Past due < 90 days >360 days Jun Total Not overdue days 360 days Trade receivables (gross) 5,505 4, Impairment losses (419) 0 (287) (132) 0 0 Trade receivables (net) 5,086 4, As at Dec Trade receivables (gross) 6,352 1,356 3, Impairment losses (419) (342) 0 0 (13) (64) Trade receivables (net) 5,933 1,014 3, The Group does not carry any material disputed trade receivables. Note7. OTHER CURRENT FINANCIAL ASSETS Under other financial assets, the Group discloses the effect of valuation of financial instruments (forward contact) and current loans advanced. Valuation of derivative financial instruments includes measurement of a forward contract used to hedge future cash flows from planned conversion of the construction credit facility used to finance the Eurocentrum project (Phase 1). Upon completion of the construction process, the PLN-denominated facility will be repaid with a new facility, denominated in a foreign currency. The forward contract was entered into with Pekao S.A., with the settlement date of March 31st 2016 and at the EUR/PLN exchange rate of 4.5. The increase in derivative financial instrument valuation assets is attributable to the reclassification of those assets to current assets as at June 30th 2015, in accordance with the forward contract maturity date, which falls within 12 months of the reporting date. Current investments Jun Dec Current loans advanced* 5,923 5,809 Valuation of derivative financial instruments 15, ,180 5,809 * Loans granted to Jan Motz for the purchase of a property in Krynica. 49

51 Note8. CASH AND CASH EQUIVALENTS Jun Dec Cash in hand and at banks: 43,627 32,216 Pekao S.A. 15,955 14,428 mbank S.A. 4,971 3,644 PKO BP S.A. 6,397 3,494 Getin Noble Bank S.A. 3,336 1,327 BZ WBK S.A. 2,477 2,251 Raiffeisen Bank Polska S.A. 7,852 3,444 Bank BGŻ BNP Paribas S.A. 1,275 2,207 RBS Pekao Bank Hipoteczny S.A Other (including cash in hand) Other cash: 49, ,370 Current deposits with maturities of up to three months 48, ,018 Overnight deposits 1,313 9,352 93, ,586 Cash and cash equivalents include restricted cash of PLN 9,948 thousand at June 30th 2015 (December 31st 2014: PLN 14,577 thousand). The restricted cash is held (blocked) in bank accounts as security for repayment of borrowings and lease liabilities incurred by the Group companies. Note9. EQUITY The structure of the Company s share capital at June 30th 2015 is presented below: Series/issue and type of shares Number of shares Par value (PLN) Par value of series / issue Form of payment Registration date Series A, ordinary bearer non-preferred shares 100, ,000 cash contribution Series B, ordinary bearer non-preferred shares 71,693, ,693,301 Series C, ordinary bearer non-preferred shares 20,955, ,955,314 Series D, ordinary bearer non-preferred shares 604, ,024 Series E, ordinary bearer non-preferred shares 9,230, ,230,252 Series F, ordinary registered preferred shares (voting preference) 2,765, ,765, ,348, ,348,131 cash contribution and noncash contribution cash contribution cash contribution non-cash contribution cash contribution

52 The par value of all outstanding shares is PLN 1 (one złoty) per share. The shares are fully paid, and the rights conferred by the shares are not restricted in any way. The Company s shareholding structure, including shares held by Members of the Management Board, as at June 30th 2015: Shareholder Number of shares % ownership interest Number of voting rights % of total voting rights CP Holdings S. à r. l. 77,414, % 77,414, % Jan Motz 2,805, % 5,571, % Jerzy Kowalski 2,792, % 2,792, % Michał Koślacz 320, % 320, % Marcin Juszczyk 302, % 302, % Other 21,712, % 21,712, % Total 105,348, % 108,113, % The Company s shareholding structure, including shares held by Members of the Management Board, as at the date of issue of these interim condensed consolidated financial statements: Shareholder Number of shares % ownership interest Number of voting rights % of total voting rights CP Holdings S. à r. l. 77,359, % 77,359, % Jan Motz 2,805, % 5,571, % Jerzy Kowalski 2,792, % 2,792, % Michał Koślacz 320, % 320, % Marcin Juszczyk 302, % 302, % Other 21,767, % 21,767, % Total 105,348, % 108,113, % On January 14th 2015, Marcin Juszczyk and Michał Koślacz exercised their rights under subscription warrants by acquiring 302,012 Series D shares each, at the nominal price of PLN 1 per share. On March 3rd 2015, Series D shares were registered with the National Court Register. As a result, the Company s share capital was increased from PLN 104,774,107 to PLN 105,348,131, by way of an issue of 604,024 Series D ordinary bearer shares, as part of a conditional share capital increase through the exercise of rights attached to 604,024 subscription warrants. Other capital reserves Jun Dec Capital from changes in Group s structure 7,792 7,792 Capital from measurement of share-option plan for Management Board members 6,120 4,776 13,912 12,568 The increase in capital from measurement of the share-option plan compared with the end of 2014 results from remeasurement of the plan as at June 30th For a detailed description of the share-option plan and rules of its measurement see Note 26 to these financial statements. 51

53 Equity attributable to non-controlling interests Jun Dec At beginning of period 64,776 68,807 Dividend paid to investors (2,230) (4,113) Share in profit/loss of subsidiaries 3, At end of period 65,805 64,776 Note10. BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES Jun Dec Bank borrowings 688, ,827 Lease liabilities 42, ,459 Derivative financial instruments (IRS)* 6,492 6, , ,617 Non-current bank borrowings and other financial liabilities 714, ,878 Current bank borrowings and other financial liabilities 23,242 44,739 * Derivatives are used by the Group to hedge against the interest rate and EUR/PLN exchange rate risks related to liabilities incurred, and are not traded. Liabilities by maturity: Jun Dec Up to one year 23,242 44,739 1 year to 3 years 66, ,978 3 years to 5 years 184,652 58,722 More than 5 years 463, , , ,617 As at June 30th 2015, liabilities maturing in up to one year included: current portion of non-current borrowings of PLN 16,933 thousand, current portion of non-current finance lease liabilities of PLN 6,309 thousand. KEY CREDIT FACILITIES The Group has relations with several banks. Most of the credit facilities contracted by Group companies are investment or construction credit facilities. In their credit facility agreements, Group companies undertook to maintain specific levels of selected financial ratios. The key covenants include maintenance of the Loan to Value and Debt Service Coverage ratios at specified levels. Most of the facilities are denominated in EUR and measured at each reporting date. Therefore, any movements in the EUR/PLN exchange rate have a material bearing on the PLNdenominated structure of the Group s statement of financial position. 52

54 Credit facility agreement with Getin Noble Bank On July 22nd 2013, Capital Park S.A. signed a credit facility agreement with Getin Noble Bank, under which the Company obtained a credit facility of up to EUR 10m to finance its day-to-day operations. The facility bears interest at a variable rate equal to 3M EURIBOR plus margin. The final repayment date of the last disbursement under the facility is December 20th Credit facility agreement with Powszechna Kasa Oszczędności Bank Polski S.A. (CP S.A.) On March 16th 2015, Capital Park S.A. entered into a EUR 10,000,000 multi-purpose facility agreement with Powszechna Kasa Oszczędności Bank Polski S.A. The facility was granted for a period from March 16th 2015 to March 15th 2020, with the availability period until March 15th The facility had not been disbursed by the reporting date. The purpose of the facility is to finance purchases of investment property. Credit facility agreements with PEKAO S.A. Alfa project On March 6th 2007, Dakota Sp. z o.o., a subsidiary of Capital Park S.A., and Bank Pekao S.A. executed an agreement for a credit facility disbursable in two tranches totalling EUR 5,646 thousand, to refinance the purchase price of a property and all other transaction-related expenses. The facility bears interest at a variable rate equal to 3M EURIBOR plus margin. On June 8th 2015, Annex 11 to the credit facility was signed, extending the repayment date for Tranche 2 of EUR 5,646 thousand until August 31st At the reporting date, the covenants requiring that specific Debt Service Coverage (DSCR) and Loan to Value (LTV) ratios be maintained were not complied with, mainly owing to loss of revenue due to unrented office space. Consequently, a EUR 1m deposit was established as security. As agreed with the Bank, until March 31st 2016, any non-compliance with the covenants will not be treated by the Bank as an event of default under the credit facility agreement. At the same time, the Group is actively seeking tenants for the unrented office space. Beta-Gamma project On June 27th 2012, Dakota Sp. z o.o., a subsidiary of Capital Park S.A., signed a credit facility agreement with Bank Pekao S.A. whereby the Company obtained a PLN 316,820 thousand facility (advanced in the form of a construction loan of PLN 295,820 thousand and a VAT loan of PLN 21,000 thousand) to finance construction of the Eurocentrum Office Complex (Phase 1) and existing debt under bank borrowings. The facility bears interest at a variable rate equal to 3M WIBOR plus margin or 3M EURIBOR plus margin. The final repayment date of the last disbursement is March 31st Delta project On December 19th 2014, Dakota Sp. z o.o., a subsidiary of Capital Park S.A., signed an annex to the credit facility agreement executed with Bank Polska Kasa Opieki S.A. on June 27th 2012, whereby the Company obtained a EUR 36,330 thousand facility (advanced in the form of a construction loan of PLN 129,172 thousand and EUR 5,646 thousand to refinance existing liabilities) to finance construction of the Eurocentrum Office Complex (Phase 2). The facility bears interest at a variable rate equal to 1M WIBOR plus margin, 1M EURIBOR plus margin or 3M EURIBOR plus margin. The final repayment date of the last disbursement is March 31st At the reporting date, the Company had not drawn any amounts under this facility. 53

55 Credit facility agreement with Powszechna Kasa Oszczędności Bank Polski S.A. On June 29th 2012, Hazel Sp. z o.o., a subsidiary of Capital Park S.A., signed a credit facility agreement with PKO BP S.A., whereby it obtained an investment credit facility of EUR 61,131 thousand and PLN 20,000 thousand to finance the Royal Wilanów construction project and all related expenses. The facility bears interest at a variable rate equal to 1M WIBOR or 3M EURIBOR plus margin. The final repayment date of the last disbursement under the facility is September 30th On June 30th 2014, the first tranche of the construction loan was disbursed to be used for payment of amounts due to the general contractor and subcontractors. Credit Facility Agreement with Bank BGŻ BNP Paribas S.A. (formerly BNP Paribas S.A.) On June 28th 2013, Capital Park Racławicka Sp. z o.o., a subsidiary of Capital Park S.A., signed a credit facility agreement with Bank BGŻ BNP Paribas S.A. (formerly BNP Paribas S.A.), whereby it obtained EUR 6m to refinance existing debt under a credit facility. The facility bears interest at a variable rate equal to 1M EURIBOR plus margin. The final repayment date of the last disbursement under the facility is July 20th On April 29th 2015, Capital Park Racławicka Sp. z o.o. executed Annex No. 1 to the credit facility agreement, under which the repayment schedule was changed following a prepayment under the credit facility. Credit facility agreement with Alior Bank S.A. On October 24th 2012, Diamante Investment Sp. z o.o., a subsidiary of Capital Park S.A., signed a credit facility agreement with Alior Bank S.A., whereby it obtained a PLN 32,366 thousand credit facility to finance construction of a shopping centre in Łódź and to refinance a previous credit facility. On March 25th 2015, Annex No. 5 to the credit facility agreement was executed, under which the credit facility amount was reduced to PLN 28,886 thousand, and the maturity date was changed, with a new due date set on March 31st Pursuant to the Annex, the credit facility bears interest at a variable rate of 3M WIBOR plus margin, while, following the conversion, it will bear interest of 3M EURIBOR plus margin. On March 31st 2015, the credit facility was converted into an investment credit facility of EUR 6,960.5 thousand. Credit facility agreements with Hypo Noe Gruppe Bank AG On April 30th 2015, the subsidiaries of the Company, i.e. CP Property sp. z o.o. ( SPV1 ) sp.k., CP Property sp. z o.o. ( SPV2 ) sp.k., CP Property sp. z o.o. ( SPV3 ) sp.k., CP Property sp. z o.o. ( SPV4 ) sp.k., CP Property sp. z o.o. ( SPV5 ) sp.k., and CP Property sp. z o.o. ( SPV6 ) sp.k., executed a credit facility agreement with HYPO NOE Gruppe Bank AG of Austria, under which the Bank granted an investment credit facility of up to EUR 26,150 thousand to refinance the existing finance lease liabilities payable by the above subsidiaries to Raiffeisen-Leasing Polska S.A. The facility advanced by HYPO NOE Gruppe Bank AG bears interest based on 3M EURIBOR plus the Bank s margin, and the term of the Credit Agreement is five years. The parties also executed an interest rate risk hedge agreement for a period of five years. 54

56 Credit facility agreement with Bank Ochrony Środowiska On March 16th 2015, Capital Park Gdańsk Sp. z o.o. executed a construction credit facility agreement of up to PLN 49,650 thousand with Bank Ochrony Środowiska S.A. Pursuant to the agreement, the credit facility is to be repaid by November 30th On March 16th 2015, Capital Park Gdańsk Sp. z o.o. executed a revolving credit facility agreement of up to PLN 1,430 thousand with Bank Ochrony Środowiska S.A. Pursuant to the agreement, the credit facility is to be repaid by March 31st None of the above credit facilities had been disbursed by the reporting date. Bank Jun Dec Pekao S.A. 101, ,020 44,400 EUR Pekao S.A. 240, , ,820 PLN PKO BP S.A. 138,269 52,558 61,131 EUR PKO BP S.A. 5,789 1,683 20,000 PLN Getin Noble Bank S.A. 41,871 42,623 10,000 EUR Bank BGŻ BNP Paribas S.A. 21,964 24,363 6,000 EUR Alior Bank S.A. 28,856 27,117 32,366 PLN Pekao Bank Hipoteczny S.A. 1,606 1,646 7,220 PLN Hypo Noe Gruppe Bank AG 107, ,150 EUR *Amounts in the currency of the agreement. 688, ,827 Credit facility amount as per agreement* Currency Interest rate Repayment 3M EURIBOR + margin from 2015 to M WIBOR + margin by M EURIBOR+margin M WIBOR+margin M EURIBOR+margin by M EURIBOR+margin by M WIBOR+margin by M WIBOR + margin from 2015 to M EURIBOR+margin by 2020 LEASE AGREEMENTS Lease agreement with mbank Leasing On June 1st 2011, Marcel Investments Sp. z o.o., as the lessee, entered into a lease agreement with mbank Leasing S.A. (formerly: BRE Leasing S.A.), as the financing party, for a commercial property located in Radom. Under the agreement, the financing party agreed to make the property available to the lessee for beneficial use for a period of 10 years (with an early termination option). Upon the lapse of the lease term, the lessee has the right to demand that the financing party enters into an ownership transfer agreement. Lease agreement with Bank BGŻ BNP Paribas S.A. On August 31st 2010, Orland Investment Sp. z o.o., as the lessee, entered into a lease agreement with BNP Paribas Lease Group Sp. z o.o, as the financing party, for a property in Warsaw comprising mixed office and retail space. Under the agreement, the financing party agreed to make the property available to the lessee for beneficial use for a period of 15 years (with an early termination option). Upon the lapse of the lease term, the lessee has the right to demand that the financing party enters into an ownership transfer agreement. 55

57 Lessor Jun Dec Initial value* Currency Bank BGŻ BNP Paribas S.A. 20,437 21,294 6,000 EUR mleasing Sp. z o.o. 19,947 21,005 5,742 EUR Raiffeisen Leasing Polska S.A. 1, ,908 26,464 EUR Raiffeisen Leasing Polska S.A. 0 4,252 5,025 PLN 42, ,459 *Amounts in the currency of the agreement. Note11. LIABILITIES UNDER NOTES IN ISSUE The Group measures notes at amortised cost (in accordance with IAS 39), which means that the amount of the liability follows from the notes cash-flow profile. Series A notes listed on the Catalyst market On July 9th 2012, Capital Park S.A. issued 1,000 thousand bearer notes with a total nominal value of PLN 100m (Series A notes). As at June 30th 2015, the outstanding nominal value of the A series notes was PLN 10m. As at the date of these financial statements, all the Series A notes were redeemed. Series B notes listed on the Catalyst ATS market On June 12th 2014, Capital Park S.A. issued 350,000 Series B bearer notes with a total nominal value of PLN 35m. The issue proceeds were used to refinance part of the Series A notes through early redemption, carried out on July 9th Series C notes listed on the Catalyst ATS market On September 23rd 2014, Capital Park S.A. issued 200,000 Series C three-year unsecured bearer notes with a nominal value of PLN 100 each and a total value of PLN 20,000 thousand, maturing on September 23rd The notes bear interest at 6M WIBOR plus a margin of 5.3%, payable every six months. The notes were issued to finance the construction of the Eurocentrum project (Phase 2; Delta building). Series D notes listed on the Catalyst ATS market On December 23rd 2014, Capital Park S.A. issued 538,855 Series D notes with a total value of up to PLN 53,886 thousand, maturing on December 23rd The nominal value of one note is PLN 100 and the notes bear interest at 3M WIBOR plus a margin of 4.3%. The purpose of the issue was to finance early redemption of Series A notes, which took place in January Series E notes listed on the Catalyst ATS market On March 18th 2015, Capital Park S.A. issued 111,145 3-year Series E unsecured bearer notes with a nominal value of PLN 100 each, and a total value of PLN 11,115 thousand, maturing on March 18th The notes bear interest at 6M WIBOR plus a margin of 4.3%. The notes were issued to finance the Group s day-to-day operations. 56

58 Series F notes On June 3rd 2015, Capital Park S. A. issued 331,163 3-year Series F unsecured bearer notes with a nominal value of PLN 100 each, and a total value of PLN 33,116 thousand, maturing on June 3rd The notes bear interest at 6M WIBOR plus a margin of 4.3%. The notes were issued to finance the Group s day-to-day operations. Bonds and notes Jun Dec Nominal amount Interest rate Maturity date Series A notes 10,000* 64,374 10,000* 6M WIBOR + 5% July 2015 Series B notes 34,557 34,446 35,000 Series C notes 19,516 19,405 20,000 Series D notes 52,699 52,493 53,886 Series E notes 10, ,115 Series F notes 32, ,116 6M WIBOR + 5.5% 6M WIBOR + 5.3% 3M WIBOR + 4.3% 3M WIBOR + 4.3% 3M WIBOR + 4.3% June 2017 September 2017 December 2017 March 2018 June 2018 Interest accrued 1,062 3, , , ,117 Long-term notes 149, ,344 Short-term notes 11,062 67,398 * PLN 10m worth of Series A notes was redeemed in full on July 9th Note12. OTHER LIABILITIES AND PROVISIONS Jun Dec Other liabilities and provisions 32,722 37,332 Security deposits from tenants 5,066 3,433 Taxes, customs duties, social security payable 3,752 2,787 Performance bonds from general contractors 3,851 2,178 45,391 45,730 Other liabilities and provisions non-current 5,292 3,665 Other liabilities and provisions current 40,099 42,065 Note13. TRADE PAYABLES Jun Dec to other entities 9,922 14,569 To related entities 0 0 9,922 14,569 Note14. RENTAL INCOME Rental income includes rents, service and maintenance charges and direct recharge invoices for service costs. The Group presents rental income by operating segments. The tenant base is highly diversified, with individual tenants shares in total rental income remaining low, under 10%. 57

59 2015 share 6 months months 2014 Retail projects 41% 14,416 11,517 Office projects 52% 18,421 9,163 Mixed-use projects 6% 2, Value Added Segment 1% % 34,996 21,672 The higher, relative to H1 2014, lease income was attributable to: completion of a new Beta-Gama office building at the Eurocentrum complex in Q2 2014, purchase of two new commercial properties in Toruń and Olsztyn in H2 2014, completion of the Vis à Vis local shopping centre in Łódź in December 2014, acquisition of new tenants at the mixed-use building at ul. Sobieskiego in Warsaw. The Group presents its rental income based on the average rent for the rental agreement term, which means that any changes in the rent rate during the rental term (rent free periods) are recognised on an accrual basis. Note15. OPERATING EXPENSES BY NATURE 6 months months 2014 Amortisation and depreciation Raw material and consumables used 6,634 4,205 Services 8,527 4,300 Taxes and charges Employee benefit expenses Measurement of the share-option plan 1,469 3,468 Other costs ,930 14,639 Note16. GAIN AND LOSS ON INVESTMENT PROPERTY REVALUATION The Group measures its properties at fair value at least at each reporting date. Revaluation gains or losses are recognised in profit or loss of the current period. The Group s profit or loss is closely linked to price movements in property markets, which are driven by rent levels, occupancy rates, changes in yields, changes in interest rates, construction costs, availability of bank financing, EUR/PLN exchange rates, and overall credit market conditions. The losses on revaluation of investment property suffered in H were largely attributable to a lower EUR/PLN exchange rate. As at the end of December 31st 2014, the EUR/PLN exchange rate stood at , whereas as at the end of the first quarter 2015 it was This decrease, translating into a more than PLN 26m loss on valuation of property (2% decrease in the exchange rate vs property value of PLN 1.7bn), was due to the fact that the value of investment properties is predominantly measured in the euro as the rents on which such measurement is based are also denominated in the euro. As a result, any fluctuations in the EUR/PLN rate generate gains in those quarters in which the EUR/PLN exchange rate strengthens and a loss in those in which the exchange rate weakens. 58

60 Investment property revaluation 2015 share 6 months months 2014 Office properties 51% (19,304) 7,127 Mixed-use properties 25% (9,560) 1,588 Retail properties 22% (8,214) 2,085 Value-added properties 2% (568) (575) 100% (37,646) 10,225 Presentation adjustment relating to presentation of rental income based on average rent 6 months months 2014 Office properties (3,969) 0 Mixed-use properties (135) 0 Retail properties (374) 0 Value-added properties 0 0 (4,478) 0 Revaluation of residential properties (5,988) 2,624 Total (48,112) 12,849 The Group presents its rental income based on the average rent for the rental agreement term, which means that any changes in the rent rate during the rental term (rent free periods) are recognised on an accrual basis. Note17. FINANCE INCOME AND COSTS Interest income 6 months months 2014 Interest on deposits 602 1,515 Interest on loans advanced Total 1,389 2,235 Interest expense 6 months months 2014 Interest on borrowings and finance leases (14,145) (5,561) Interest on notes (3,318) (897) Other interest (154) (9) Total (17,617) (6,467) Other finance income and costs 6 months months 2014 Net foreign exchange gains (losses) 4,148 (3,065) Issue costs (1,569) (1,079) Valuation of derivative instruments 6,127 2,675 Other 457 (395) Total 9,163 (1,864) 59

61 The measurement of financial instruments includes in particular measurement of the forward contract in the amount of PLN 7,434 thousand (the fair value of the contract as at June 30th 2015 was PLN 15,257 thousand), which is used to hedge future cash flows from planned conversion of the construction credit facility used to finance the Eurocentrum project (Phase 1). Note18. CURRENT AND DEFERRED INCOME TAX 6 months months 2014 Current income tax (428) (224) Deferred income tax (3,684) (2,450) Tax expense recognised in the consolidated statement of comprehensive income (4,112) (2,674) 6 months months 2014 Profit before tax (34,921) 13,434 Income tax (4,112) (2,674) Effective income tax rate (share of income tax in profit before tax) (12%) 20% Deferred tax assets Losses deductible from future taxable income Jun recognised reversed used Dec ,148 2,065 0 (945) 14,028 Unpaid interest (3,342) 0 3,342 Foreign exchange losses 1,442 1,702 (2,258) 0 1,998 Other 1,173 1,118 (842) Total 17,979 5,101 (6,442) (945) 20,265 Deferred tax liabilities Jun recognised reversed used Dec Unpaid interest 9, ,405 Revaluation of investment 2, (754) 0 2,287 property Valuation of financial 2,573 2, instruments Other (1,617) 0 1,617 Total 14,707 3,769 (2,371) 0 13,309 Note19. GUARANTEES AND SURETIES On January 15th, in connection with the EUR 61,131 thousand investment credit facility advanced by PKO Bank Polski S.A. to Hazel Investments Sp. z o.o., the Company s subsidiary, Capital Park S.A. made a commitment to support the Royal Wilanów project and to cover any overrun of the project s costs up to a maximum amount of PLN 34,070 thousand, which represents 10% of the project s costs. 60

62 On March 18th 2013, Capital Park S.A. signed a surety agreement with Alior Bank S.A. (the Bank ) providing for joint and several liability for a facility granted by the Bank to Diamante Investments Sp. z o.o., the Company s a subsidiary, for a total amount of PLN 32,366 thousand; at June 30th 2015 the amount disbursed under the facility was PLN 28,856 thousand. On March 25th 2015, Capital Park S.A. and Alior Bank S.A. (the Bank ), signed an Annex to the surety agreement, providing for joint and several liability for a facility granted by the Bank to Diamante Investments Sp. z o.o., the Company s subsidiary, for a total amount of PLN 28,886 thousand. The surety will remain valid until such time as the Borrower earns a minimum total rental income of PLN 200 thousand per month. On June 8th 2015, Capital Park S.A., Bank Polska Kasa Opieki S.A. of Warsaw, and Dakota Investments Sp. z o.o, the Company s subsidiary, executed a surety agreement whereby Capital Park S.A. provided to the Bank a surety of up to EUR 3,000 thousand in connection with a credit facility agreement executed by the Bank and the subsidiary for the financing of construction of the Eurocentrum office complex located at Al. Jerozolimskie in Warsaw (Phase 1, 2). The surety agreement will remain valid until the DSCR ratio for the constructed property (Eurocentrum Phase 1) reaches 1.0, but no longer than until December 31st On June 26th 2013, Capital Park S.A. also entered into a cost-overrun guarantee agreement with the Bank whereby the Company agreed to support the project (Eurocentrum Phase 1) and cover any cost overruns up to the amount of PLN 23,600 thousand. Furthermore, on June 8th 2015, Capital Park S.A. entered into a cost-overrun guarantee agreement with the Bank whereby the Company agreed to support the project (Eurocentrum Phase 2) and cover any cost overruns up to the amount of PLN 16,350 thousand. Note20. SECURITY ESTABLISHED ON THE GROUP S ASSETS To secure the repayment of Group companies borrowings and notes, including interest, a number of security instruments were provided to financing banks and noteholders, including in particular: promissory notes, representations on submission to enforcement, powers of attorney over bank accounts, assignment of claims under existing and future rental contracts, insurance policies, construction contracts and performance bonds, registered pledges over existing and future shares in subsidiaries, deposits, subordination agreements granting priority for satisfaction of claims under borrowings before any other claims. In addition, a number of mortgages were established on properties owned or held in perpetual usufruct by Group companies, the total value of which as at June 30th 2015 was PLN 1,204,232 thousand and EUR 607,135 thousand. Note21. OPERATING SEGMENTS The Group s business falls into the following four reporting segments, which form strategic and organisationally separate business divisions. The Group s reporting segments conduct the following activities: Office Segment development or re-development, revitalisation and commercialisation, as well as management of office projects. 61

63 Retail Segment development or re-development, revitalisation and commercialisation, as well as management of retail projects. Mixed-Use Segment development or re-development, revitalisation and commercialisation, as well as management of mixed-use projects. Value Added Segment development and sale of residential projects and other projects not classified above. In each of the segments, the Group purchases properties for development or redevelopment, prepares designs, manages administrative work, arranges financing and performs construction work, while seeking potential tenants. On completion of the construction work, the Group either administers or sells the existing building. Below are presented the Capital Park Group s investment properties and their allocation to the Group s operating segments. Office Segment Entity Project Capital Park Racławicka Sp. z o.o. Racławicka Point Dakota Investments Sp. z o.o. Eurocentrum Alfa building Dakota Investments Sp. z o.o. Eurocentrum Beta and Gamma buildings (Stage I) Dakota Investments Sp. z o.o. Eurocentrum Delta building (Stage II) Elena Investments Sp. z o.o. Piano House Sagitta Investments Sp. z o.o. Topos The Group s property portfolio in the Office Segment comprises six projects. The largest project is the Eurocentrum Office Complex, located in Warsaw, at Al. Jerozolimskie, comprising the completed Alfa, Beta and Gamma buildings (placed in service on May 29th 2014) and the Delta building under construction. Retail Segment Entity Aspire Investments Sp. z o.o. Aspire Investments Sp. z o.o. Aspire Investments Sp. z o.o. Diamante Investments Sp. z o.o. Marcel Investments Sp. z o.o. Nerida Investments Sp. z o.o. Zoe Investments Sp. z o.o. Vera Investments Bis Sp. z o. o. Oberhausen Sp. z o.o.** Real Estate Income Assets FIZ AN Project Piłsudskiego, Olsztyn KEN, Warsaw Szosa Lubicka, Toruń Vis à Vis Toruń Street Mall Vis à Vis, Łódź Street Mall Vis à Vis, Radom Capitol, Lidzbark Warmiński, Leszno, Warsaw Biskupa Domina, Koszalin ETC Gdańsk In the Retail Segment, the Group has 47 investment projects. The properties included in the retail portfolio are situated in city-centre locations all over Poland. Most of the retail projects have been completed. 62

64 Mixed-Use Segment Entity ArtN Sp. z o. o. Capital Park Gdańsk Sp. z o.o. Hazel Investments Sp. z o.o. Orland Investments Sp. z o.o. Project Warszawa Żelazna Neptun House Royal Wilanów Warsaw, Sobieskiego In the Mixed-Use Segment, the Group has four projects. In common with the other segments described above, they are both finished projects and projects in preparation. They are projects combining office and retail functions, and in some cases also other functions, with each function accounting for a significant portion of the total space. Value Added Segment Entity Project Capital Park Kraków Sp. z o.o.* Apartamenty Stachowicza, Kraków CP Management Sp. z o.o. Al. Słomińskiego 10, Gdańsk CP Management Sp. z o.o. Kościuszki, Tuchola, CP Management Sp. z o.o. Kopernika, Grudziadz CP Management Sp. z o.o. Pomorzanin, Bydgoszcz CP Management Sp. z o.o. Polonia, Włocławek CP Management Sp. z o.o. Tivoli, Grudziądz CP Management Sp. z o.o. kino Świt (Świt movie theatre), Brodnica, Dakota Investments Sp. z o.o. Eurocentrum Crown, Warsaw Emir 30 Sp. z o.o. Unieście Marlene Investments Sp. z o.o. Święcajty, Mazury Sander Investments Sp. z o.o.* Rubinowy Dom, Bydgoszcz Sapia Investments Sp. z o.o. Sp. Kom.* Śmiała, Warsaw Vera Investments-Bis Sp. z o.o.* Chełmińska, Grudziądz Vera Investments Bis Sp. z o. o. Marynarz, Gdynia RM 1 Sp. z o.o.** Warszawa Pałacowa (Street Mall Vis à Vis) Rezydencje Pałacowa Sp. z o.o.** Rezydencje Pałacowa (Phase I) Rezydencje Pałacowa Sp. z o.o.** Rezydencje Pałacowa (Phase II) * Projects presented in inventory. ** Projects accounted for using the equity method. The last segment is the Value Added Segment, which comprises 15 projects. It includes the Group s residential projects as well as other projects not classified under any of the other segments. Presented below are financial highlights for the individual segments as at June 30th 2015 and June 30th 2014: 63

65 Jun Office Segment Retail Segment Mixed-Use Segment Value Added Segment Other Total Segment s revenue from sales to third-party 18,441 14,424 2, ,131 customers Operating expenses (7,345) (2,996) (2,114) (635) (4,840) (17,930) Segment s operating profit/loss (before 11,096 11, (458) (4,392) 18,201 property revaluation) Finance costs (8,442) (5,394) (320) 0 (3,461) (17,617) Finance income 8, ,763 12,607 Segment s profit/loss before extraordinary items (before property revaluation) 11,571 6, (430) (5,090) 13,191 Gain/loss on investment property revaluation Segment s profit/loss before tax (23,272) (8,588) (9,695) (6,557) 0 (48,112) (11,701) (1,898) (9,245) (6,987) (5,090) (34,921) Segment s assets 762, , , ,337 92,049 1,903,362 Segment s liabilities 396, , ,285 2, , ,395 Jun Office Segment Retail Segment Mixed-Use Segment Value Added Segment Other Total Segment s revenue from sales to third-party 9,163 11,130 1,274 1,166 (407) 22,326 customers Operating expenses (4,540) (2,153) (1,920) (1,245) (4,781) (14,639) Segment s operating profit/loss (before 4,623 8,977 (646) (79) (5,188) 7,687 property revaluation) Finance costs (2,394) (3,079) (463) (8,233) 4,832 (9,337) Finance income ,758 2,235 Segment s profit/loss before extraordinary items (before property revaluation) 2,260 5,973 (1,097) (7,953) 1, Gain/loss on investment property revaluation Segment s profit/loss before tax 7,127 2,085 1,588 2, ,849 9,387 8, (5,904) 1,402 13,434 Segment s assets 763, , ,747 94, ,928 1,794,007 Segment s liabilities 339, ,954 40,174 8, , ,551 The Group s entire revenue is earned in Poland. There are no transactions between the Group s segments that would need to be eliminated, and there is no income or costs relating to discontinued operations. 64

66 Note22. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net profit for a given period attributable to holders of ordinary shares by the weighted average number of outstanding ordinary shares in that period. Diluted earnings per share are calculated by dividing the net profit for a given period attributable to holders of ordinary shares by the weighted average number of outstanding ordinary shares in that period adjusted for the effect of dilutive options and dilutive redeemable preference shares convertible into ordinary shares. Calculation of loss (earnings) per share assumptions 6 months months 2014 Net profit/loss from continuing operations (42,292) 8,469 Profit/loss from discontinued operations 0 0 Loss (profit) reported for calculating basic earnings per share Dilutive effect Loss (profit) reported for calculating diluted earnings per share (42,292) 8, (42,292) 8,469 Number of shares outstanding Jun Jun Weighted average number of shares reported for calculating basic earnings per share (thousand shares) 104, ,744 Effect of dilutive ordinary shares 2,333 3,186 share options 2,954 3,554 Weighted average number of ordinary shares reported for calculating diluted earnings per share (thousand shares) 107, ,930 Net loss (earnings) per share (PLN) Basic (0.40) 0.08 Diluted (0.40) 0.08 The entire loss was generated from continuing operations. Note23. FINANCIAL INSTRUMENTS The primary financial instruments used by the Group s companies include credit facilities, loans, notes/bonds, finance lease agreements, derivatives, and trade payables. The Group uses credit facilities, loans and finance lease agreements to finance its day-to-day operations. The Group companies hold financial assets, such as trade receivables, loans advanced, derivatives, cash, and short-term deposits. According to its policy, the Group does not trade in financial instruments. 65

67 The table below presents a comparison of all carrying amounts and fair values of the Group s financial instruments, broken down into individual classes and categories of assets and liabilities. Fair values of individual categories of financial instruments: FINANCIAL ASSETS Carrying amount (fair value) Jun Dec Financial instrument category Trade and other receivables 60,279 52,672 Receivables and loans Trade receivables 5,086 5,933 Other receivables 23,817 16,149 Loans advanced 31,376 30,590 Financial assets at fair value through profit or loss, including: 15,257 7,823 Derivative financial instruments 15,257 7,823 Financial assets at fair value through profit or loss Cash and cash equivalents 93, ,586 Receivables and loans Carrying amount (fair value) FINANCIAL LIABILITIES Dec 31 Jun Interest-bearing borrowings and notes, including: 849, ,569 Financial instrument category Other financial liabilities Bearing interest at variable rates 849, ,569 Bearing interest at fixed rates 0 0 Other financial liabilities, including: 48, ,790 Finance lease liabilities 42, ,459 Derivative financial instruments (IRS) 6,492 6,331 Other financial liabilities Trade payables and other liabilities 55,313 60,299 Other financial liabilities Trade payables 9,922 14,569 Other liabilities 45,391 45,730 Credit risk exposure is capped at fair value. The carrying amounts of both financial assets and financial liabilities are equal to their fair values, which follows from the fact that the Group measures derivative financial instruments at fair value, while other items are measured at values at which individual assets or liabilities could be sold or purchased. Note24. FINANCIAL RISK MANAGEMENT The Group s business activities expose it to a number of various financial risks, in particular interest rate risk, currency risk, credit risk, and liquidity risk. The Parent s Management Board verifies and establishes rules for managing each of these types of risk; the rules are briefly discussed below. The Group also monitors the risk of market prices with respect to the financial instruments it holds. 66

68 FINANCIAL RISK FACTORS Financial assets and liabilities as at June 30th 2015 and December 31st 2014 Jun Dec Type of assets, liabilities and receivables exposed to market risk Investment property Financial liabilities Loans and receivables Total exposed to currency risk exposed to interest rate risk Total exposed to currency risk exposed to interest rate risk 1,706,977 1,706, ,595,986 1,595, , , , , , , , , , ,590 INTEREST RATE RISK The Group is exposed to interest rate risk related to the nature of its business and the type of financing sources used (interest and principal payments). Bank and non-bank borrowings, as well as variable-rate debt instruments make the Group s cash flows sensitive to interest rate fluctuations. The Group monitors its interest rate risk exposure on an ongoing basis and assesses its potential impact on the Group s profit or loss. To minimise the exposure, the Group enters into derivative transactions, including interest rate swaps and CAP options. The table below presents sensitivity of the profit or loss before tax for the first six months of 2015 and 2014 to probable fluctuations in interest rates on a ceteris paribus assumption (related to interest-bearing assets and liabilities): 6 months months 2014 Effect on profit or loss before tax and equity 1pp increase in interest rates 1pp decrease in interest rates 1pp increase in interest rates 1pp decrease in interest rates Financial liabilities (4,459) 4,459 (3,410) 3,410 Loans and receivables 156 (156) 162 (162) Total (4,303) 4,303 (3,248) 3,248 If as at June 30th 2015 annual interest rates on bank and non-bank borrowings and debt securities denominated in PLN had been 1 pp higher/lower compared with the current level, ceteris paribus, the Group s profit or loss for the period and its equity for the six months of 2015 would have been PLN 4,303 thousand (six months of 2014: PLN 3,248 thousand) lower/higher compared with the current level, mainly due to higher/lower interest expense on borrowings and variable-rate notes. CURRENCY RISK The key sources of currency risk for the Group include the nature of its business (with revenue denominated in EUR), as well as buy and sell transactions and financing cash flows related to repayment of borrowings denominated in currencies other than its functional currency. The Group mitigates the risk by using natural hedges, matching revenues and expenses for the same currency, or by using derivative instruments to hedge its foreign-currency transactions. 67

69 The table below presents sensitivity of the Group s profit or loss before tax (arising from changes in the fair value of assets, including in particular investment property and liabilities) and equity to possible fluctuations in EUR/PLN exchange rate, on a ceteris paribus assumption: Effect on profit or loss before tax and equity Investment property and financial liabilities 1pp depreciation of PLN against EUR* 6 months months pp 1pp appreciation depreciation of of PLN against PLN against EUR* EUR 1pp appreciation of PLN against EUR (6,266) 6,266 (11,905) 11,905 * Exchange rates used: reporting date (June 30th 2015) rate of EUR 1= PLN , and the same rate increased by 1pp, i.e. EUR 1 = PLN If the złoty had depreciated/appreciated by 1 percentage point against the euro, ceteris paribus, the Group s profit or loss for the 6 months of 2015 would have been PLN 6,266 thousand higher/lower (6 months of 2014: PLN 11,905 thousand), driven mainly by foreign exchange losses/gains on translation of investment properties and financial liabilities denominated in the euro. CREDIT RISK Credit risk is related primarily to cash and cash equivalents, deposits with banks, loans advanced as well as credit exposure to tenants, which involves mainly unrealised receivables. The Group mitigates the risk by entering into transactions with reputable firms with sound credit standing, by demanding that rental contracts be secured with rental deposits or bank guarantees, usually in the amount of triple monthly rentals, and by diversifying cash deposits (the Group has relationship with a relatively large number of banks). For more details, see Note 8. As regards the Group s financial assets such as cash and cash equivalents, financial assets available for sale and some derivatives, the credit risk exposure is capped at fair value of the instrument. At June 30th 2015 and December 31st 2014, past due receivables were as follows: Past due Jun Total Not overdue < >360 Trade receivables 5,086 4, Other receivables 23,817 23, Loans advanced 31,376 31, ,279 60, Past due Dec Total Not overdue < >360 Trade receivables 5,933 1,014 3, Other receivables 16,149 16, Loans advanced 30,590 30, ,672 47,753 3,

70 LIQUIDITY RISK The Group seeks to maintain a balance between the continuity of financing of its investment activities and timely repayment of debt by securing financing from various sources, such as bank and non-bank borrowings, notes/bonds or finance leases. The Management Board manages liquidity risk by monitoring budgets of the Group s investment projects and maturities of its financial liabilities, and by projecting operating cash flows. The Management Board monitors performance of all credit facility and lease agreements on an on-going basis. The table below presents the Group s financial liabilities by maturity at June 30th 2015 and December 31st 2014, based on contractual undiscounted payments. Jun Interest-bearing borrowings and lease liabilities Total > 3 months 3 12 months From 1 to 3 years From 3 to 5 years > 5 years 730,885 3,570 19,672 66, , ,832 Notes in issue 160,998 11, , Trade payables and other 55,313 55, liabilities Derivatives 6, ,740 2, ,688 70,858 22, , , ,832 Dec Interest-bearing borrowings and lease liabilities Total > 3 months 3 12 months From 1 to 3 years From 3 to 5 years > 5 years 625,286 8,806 35, ,978 58, ,846 Notes in issue 173,742 3,024 64, , Trade payables and other liabilities 72,980 72, Derivatives 6, , ,339 84, , ,053 58, ,177 69

71 Note25. CAPITAL MANAGEMENT The main objective of capital management is to maintain a safe capital structure. The Group monitors its capital position using the net debt ratio, calculated as net debt to total equity, as well as the debt ratio, calculated as total liabilities to total equity. Net debt ratio Jun Dec Interest-bearing borrowings, lease liabilities and notes 898, ,359 Cash and cash equivalents (93,167) (169,586) Net debt 805, ,773 Total equity 934, ,791 Equity and net debt 1,740,175 1,615,564 Net debt ratio 46.3% 39.4% Note26. INCENTIVE SCHEME FOR MEMBERS OF THE MANAGEMENT BOARD The objective of the Incentive Scheme is to provide incentives that will encourage, retain and motivate the Eligible Persons (at the scheme inception date members of the Company s Management Board) to work towards the Company s shareholder value growth. These incentives consist in enabling the Eligible Persons to acquire Company Shares. The key assumptions of the Incentive Scheme are set out in a resolution of the Extraordinary General Meeting of Capital Park S.A. of September 30th 2013 and the Rules of the Incentive Scheme (attached to the resolution). Key terms of the Incentive Scheme The Incentive Scheme is addressed to Jan Motz, Jerzy Kowalski, Michał Koślacz and Marcin Juszczyk, as long as they remain members of the Company s Management Board. As part of the Incentive Scheme, the Company is authorised to issue up to 7,218,738 registered subscription warrants carrying rights to acquire a total of 7,218,738 Series D ordinary bearer shares in the Company. The subscription warrants will be issued in series from A to G, and granted free of charge. The subscription warrants may be inherited, but may not be encumbered and are not transferable. The date of allotment of Series A warrants may fall no later than one month after the allotment of shares in the public offering. The allotment date for Series B to Series G warrants falls no later than two months after the publication of the full-year or half-year financial statements, audited or reviewed by a qualified auditor. On the date of allotment of Series A warrants a total of 604,024 Series A warrants were granted to Marcin Juszczyk and Michał Koślacz. The number of Series B to Series G warrants allotable on future allotment dates will depend on the following economic criteria: increase in net asset value at the allotment date and increase in the market price of Company shares on the allotment date. Each warrant will confer the right to acquire one Series D share, at an issue price of PLN 1 per share. 70

72 All rights to acquire Series D shares under the warrants will expire on December 31st The Black-Scholes model was applied for valuation of the subscription warrants under the Incentive Scheme. As part of remeasurement of the Incentive Scheme as at December 31st 2014, it was assumed that a total of 3,558,035 warrants would be exchanged for shares. Based on the assumed number of warrants and the current price of Company shares, the total value of the Incentive Scheme was estimated at PLN 10,958 thousand. The total cost of the Incentive Scheme is expensed over time in proportion to its duration. Capital reserve from measurement of the Incentive Scheme as at June 30th 2015 was PLN 6,120 thousand. The difference between the value of capital reserve from measurement of the Incentive Scheme as at June 30th 2015 and as at December 31st 2014 was charged to costs, as presented in the table below: Cost of share-option plan measurement Jun Dec Cost of share-option plan measurement 1,344 3,042 Provision for the cost of bonuses related to warrants ,344 3,906 Pursuant to Resolution No. 1/12/2013 of the Supervisory Board of December 19th 2013, on January 3rd 2014, Marcin Juszczyk and Michał Koślacz were each allotted as part of the Incentive Scheme 302,012 Series A subscription warrants carrying rights to acquire the same number of Series D shares in the Company, at a price of PLN 1 per share. The allotted subscription warrants could be converted into Company shares not earlier than one year after the date of allotment, that is January 3rd On January 14th 2015, Marcin Juszczyk and Michał Koślacz exercised their rights under allotted subscription warrants by acquiring 302,012 Series D shares each, at the nominal price of PLN 1 per share. For more information on the Company shares held by Management Board Members, see Note 9 to these financial statements. 71

73 Note27. RELATED-PARTY TRANSACTIONS Receivables from related parties under loans Liabilities to related parties under loans Jun Dec Jun Dec CAPITAL PARK S.A. 489, ,008 59,674 57,825 Subsidiaries 318, , , ,344 Total 807, , , ,169 Other receivables from related parties Other liabilities to related parties Jun Dec Jun Dec CAPITAL PARK S.A. 4,337 3, Subsidiaries 5,912 5,424 9,829 8,371 Total 10,249 8,786 10,249 8,786 Interest income on loans advanced Interest expense on loans received 6 months months months months 2014 CAPITAL PARK S.A. 14,827 18,493 1,850 1,969 Subsidiaries 9,025 10,015 22,002 26,539 Total 23,852 28,508 23,852 28,508 Revenue from sale of services Cost of purchased services 6 months months months months 2014 CAPITAL PARK S.A. 1, Subsidiaries 9,630 6,458 10,539 6,333 Total 10,658 6,494 10,658 6,494 The tables above present the balances, transactions, and cash flows between all entities of the Group. In the period January 1st to June 30th 2015, Capital Park S.A. did not conclude any related-party transactions other than on an arm s length basis. Note28. EVENTS SUBSEQUENT TO THE REPORTING DATE Redemption of the last part of Series A notes and interest on the notes On July 9th 2015, Capital Park S.A. carried out a redemption of the last part of notes, i.e. 100 thousand Series A bearer notes with a nominal value of PLN 100 per note and a total value of PLN 10,000 thousand. The Company raised cash for the early redemption by way of an issue of Series E notes on March 15th On July 9th 2015, Capital Park S.A. paid the last interest on Series A notes totalling PLN 350 thousand. Opening of Royal Wilanów On August 18th 2015, the Group obtained an occupancy permit for a part of the mixed-use (office and retail) project Royal Wilanów (project owned by subsidiary Hazel Investement Sp. z o.o.). 72

74 Issue of Series G notes On August 14th 2015, Capital Park S.A. issued 18,837 3-year unsecured Series G notes with a total value of PLN 1,884 thousand. Interest on the notes is payable on a quarterly basis, at a variable rate of 3M WIBOR plus a margin of 4.3%. The offering of series G notes was carried out under the public note issue programme of up to PLN 100m, and was the last of the public offerings to be carried out under the prospectus approved by the Polish Financial Supervision Authority on November 14th Annex to the general contractor agreement On July 7th 2015, Hazel Investments Sp. z o. o., a Capital Park Group company, and Erbud S.A., a construction company, signed an annex amending the general contractor agreement relating to the Royal Wilanów project. The annex defines the scope of additional, substitute, and cancelled works, providing for an additional lump-sum fee of PLN 2,886, payable to the general contractor. Furthermore, the annex confirmed that the provisional amount for finishing works, as provided for in the Agreement, the use of which depended on the project owner s instructions, had been partially used (i.e. the amount of PLN 7,682,214.10). Creation of mortgages over investment property On July 30th 2015, the District Court for the Capital City of Warsaw Mokotów in Warsaw, 7th Land and Mortgage Register Division, entered (i) a joint contractual mortgage of up to EUR 24m, and (ii) a joint contractual mortgage of up to PLN 50m, for the benefit of Pekao Bank Hipoteczny S.A. Also on July 30th 2015, the District Court for the Capital City of Warsaw Mokotów in Warsaw, 7th Land and Mortgage Register Division, entered a change in the amount of joint contractual mortgage from EUR 148m to EUR 193m, for the benefit of Bank Polska Kasa Opieki S.A. The above mortgages are created over the property located at Al. Jerozolimskie in Warsaw, which is owned by Dakota Investments Sp. z o.o., a Capital Park Group company. The mortgages serve as security in respect of monetary claims under the credit facility agreement of June 27th 2012, as amended. Warsaw, August 25th 2015 SIGNATURE OF THE PERSON WHO PREPARED THE FINANCIAL STATEMENTS: Małgorzata Koc Chief Accountant SIGNATURES OF MANAGEMENT BOARD MEMBERS: Jan Motz President of the Management Board Michał Koślacz Member of the Management Board Marcin Juszczyk Member of the Management Board Jerzy Kowalski Member of the Management Board 73

75 Directors Report on the operations of the Capital Park Group for the first half of 2015 DIRECTORS REPORT ON THE OPERATIONS OF THE CAPITAL PARK GROUP FOR THE FIRST HALF OF 2015 Warsaw, August

76 Directors Report on the operations of the Capital Park Group in the period from January 1st to December 31st 2014 TABLE OF CONTENTS INTRODUCTION KEY INFORMATION ON THE COMPANY AND THE CAPITAL PARK GROUP OPERATIONS OF THE CAPITAL PARK GROUP IN H STATEMENT OF COMPLIANCE WITH CORPORATE GOVERNANCE STANDARDS SHARE CAPITAL AND SHAREHOLDERS FACTORS AND EVENTS, IN PARTICULAR OF NON-RECURRING NATURE, WITH A MATERIAL EFFECT ON FINANCIAL PERFORMANCE SEASONAL AND CYCLICAL CHANGES IN THE BUSINESS OF CAPITAL PARK S.A ISSUE, REDEMPTION AND REPAYMENT OF EQUITY AND NON-EQUITY SECURITIES DIVIDEND PAID OR DECLARED MANAGEMENT BOARD S POSITION ON THE FEASIBILITY OF MEETING PREVIOUSLY PUBLISHED ANNUAL PROFIT FORECASTS OTHER INFORMATION WHICH IS, ACCORDING TO THE COMPANY, MATERIAL FOR THE ASSESSMENT OF THE STAFFING LEVELS, ASSETS, FINANCIAL STANDING AND FINANCIAL PERFORMANCE, OR CHANGES IN ANY OF THE FOREGOING, AND INFORMATION MATERIAL FOR THE ASSESSMENT OF THE COMPANY S ABILITY TO FULFIL ITS OBLIGATIONS FACTORS WHICH, IN THE COMPANY S OPINION, WILL AFFECT THE COMPANY S PERFORMANCE IN THE NEXT QUARTER, OR IN A LONGER TERM

77 Directors Report on the operations of the Capital Park Group for the first half of 2015 INTRODUCTION The Capital Park Group is one of the leading and most dynamically developing investment firms on the Polish real property market. For over ten years, the Group has been engaged in the execution and management of real property projects, specialising in complex property development and revitalisation projects that generate above-average margins. Since its inception, the Group has completed approximately 100 investment transactions and currently manages a property portfolio of 76 projects throughout Poland, with a total area of around 249,000 m2. The Group manages its own projects as well as projects owned by financial institutions (investment fund management companies). Capital Park S.A. (the Company ) began its operations on November 12th 2010 as a holding company, consolidating the Capital Park Group s operations. Since July 28th 2011, the Company has been the parent of the CAPITAL PARK Group (the Group ) and has prepared consolidated financial statements. On December 13th 2013, Capital Park S.A. was first listed on the Warsaw Stock Exchange, and has since attracted leading pension funds and investment fund management companies as investors in its shares. 76

78 Directors Report on the operations of the Capital Park Group for the first half of KEY INFORMATION ON THE COMPANY AND THE CAPITAL PARK GROUP GROUP STRUCTURE As at June 30th 2015, the CAPITAL PARK Group comprised 47 entities, including the parent Capital Park S.A. and 46 subsidiaries. The Group s property and projects are managed by CP Management Sp. z o.o. Below is presented the structure of the Group as at June 30th CAPITAL PARK SA CP RETAIL B.V. Capital Park Gdańsk 100% 100% Sp. z o. o. CP Development S.à r.l. 100% ArtN Sp. z o. o. 100% Oberhausen Sp. z o. o. Orland Investments 53% 100% Sp. z o. o. Capital Park Racławicka Sp. z o. o. 100% Sporty Department Store Sp. z o. o. 90% Dakota Investments Sp. z o. o. Hazel Investments 100% 100% Sp. z o. o. Marlene Investments Sp. z o. o. 100% Fundacja Otwartego Muzeum Dawnej Fabryki Norblina 100% CP Retail ( SPV 1 ) Sp. z o. o. Diamante Investments 100% 100% Sp. z o. o. CP Management Sp. z o. o. 100% DT-SPV 12 Sp. z o. o. 100% REIA FIZAN Sagitta Investments 15% 100% Sp. z o. o. Sander Investments Sp. z o. o. 100% Silverado Investments Sp. z o. o. 100% CP Property S.à r.l Aspire Investments 100% 100% Sp. z o. o. Zoe Investments Sp. z o. o. 100% Capital Park Opole Sp. z o. o. 100% CP Property SCSp Alferno Investments 100% 100% Sp. z o. o. Marcel Investments Sp. z o. o. 100% Elena Investments Sp. z o. o. 100% CP Property Sp. z o. o. Nerida Investments 100% 100% Sp. z o. o. Sapia Investments Sp. z o. o. 100% Vera Investments Bis Sp. z o. o. 100% CP Property Sp. z o. o. ("SPV1") Sp.k. 100% Emir 30 Sp. z o. o. 100% Patron Wilanow S. à r.l. 50% Sapia Investments Sp. z o. o. Sp.k. 67% CP Property Sp. z o. o. ("SPV2") Sp.k. CP Retail ( SPV 2 ) 100% 100% Sp. z o.o. Capital Park Kraków Sp. z o. o. 100% Rezydencje Pałacowa Sp. z o. o. 100% CP Property sp. z o. o. ("SPV3") Sp.k. 100% CP Invest S.A. 100% RM1 Sp. z o. o. 100% CP Property Sp. z o. o. ("SPV4") Sp.k. 100% CP Property Sp. z o. o. ("SPV5") Sp.k. 100% CP Property Sp. z o. o. ("SPV6") Sp.k. 100% Notes: 1 CP Retail B.V. holds 15% of investment certificates of Real Estate Income Assets FIZ AN ( REIA FIZ AN ). As at this report publication date, the Group controls REIA FIZ AN. 2 REIA FIZ AN s direct subsidiary. The Group holds a 15% equity interest in the company indirectly through REIA FIZ AN investment certificates. 3 A subsidiary of CP Property SCSp and CP Property Sp. z o.o. (REIA FIZ AN s subsidiaries). CP Property Sp. z o.o. is the general partner and CP Property SCSp. is the limited partner in the company. The Group is entitled to a 15% share of the company s profits or losses indirectly through REIA FIZ AN investment certificates. 4 CP Management Sp. z o.o. holds 667 shares (25%) in DT-SPV 12 Sp. z o.o., and Vera Investments Bis Sp. z o.o. holds 1,973 shares (75%). 5 ArtN Sp. z o.o. is the founder of the Open Museum of the Former Norblin Factory Foundation. 77

79 Directors Report on the operations of the Capital Park Group for the first half of The remaining 50% of the shares in Patron Wilanow S.à r.l., a joint venture SPV, are held by Real Management S.A. Patron Wilanow S.à r.l. holds 100% of the shares in Rezydencje Pałacowa Sp. z o.o. and RM1 Sp. z o.o. 7 A subsidiary of Patron Wilanow S. à r.l. The Group indirectly holds 50% of shares in the company s share capital and the right to a 64% share in its profits. 8 Sapia Investments Sp. z o.o. is the general partner of Sapia Investments Sp. z o.o. Sp. k., and a third party is its limited partner. 9 Vera Investments - Bis Sp. z o.o. was established by way of a merger of 14 Group companies. Capital Park S.A. holds 41,710 shares (73.81%) in Vera Investments - Bis Sp. z o.o., and CP Management Sp. z o.o. holds 14,800 shares (26.19%) in the company. CHANGES IN THE GROUP STRUCTURE Establishment of a new company On March 20th 2015, Sporty Department Store Sp. z o.o. was established, with the following shareholders: ArtN Sp. z o.o. of Warsaw (holding 90% of the shares) and Ms Kinga Nowakowska (holding 10% of the shares). The company s business consists in trading in sports goods. On April 16th 2015, the Company was entered in the register of entrepreneurs of the National Court Register. JV Agreement On April 1st 2015, CP Retail B.V. of the Netherlands, a subsidiary of Capital Park S.A., acquired a 53% interest, with a nominal value of PLN 5 thousand, in the share capital of Oberhausen Sp. z o.o. of Warsaw. The remaining 47% interest in the company is held by Galaxy Real Estate Sp. z o.o., an Akron Group company. The agreement provides for the acquisition, redesign and management of a shopping centre in Gdańsk. THE GROUP S PROPERTY PORTFOLIO As at June 30th 2015, the Capital Park Group managed a portfolio of 76 projects in 37 cities across Poland, with a total gross leasable area (GLA) of 249,000 m², comprising construction, retail, mixed-use, and other projects. At June 30th 2015, the fair value of the portfolio was PLN 1.7bn. Completed projects accounted for over a half of the portfolio (PLN 863m). The largest of them include: Eurocentrum Office Complex Stage I (Beta Gamma) completed in May 2014, Eurocentrum Alfa, Racławicka Point, Sobieskiego 104, Radom Street Mall Vis à Vis, and 39 high street locations (FIZ AN). As at June 30th 2015, the Group had three projects under construction: (i) the Royal Wilanów retail and office project, completed on August 19th 2015; (ii) the Eurocentrum Office Complex Stage II (Delta), scheduled for completion in Q4 2015, and (iii) the Topos office project, scheduled for completion in Q Following the completion of the Royal Wilanów project, completed projects will account for nearly 70% of the Group s portfolio value. Projects in preparation represented 23% of the Group s portfolio (PLN 392m). The largest projects to be commenced in the coming years include the ArtN project, for which a final approval of the construction plans and specifications and building permit were issued by the Governor of the Province of Warsaw on August 28th 2014, and a property 78

80 Directors Report on the operations of the Capital Park Group for the first half of 2015 located in the very heart of Gdańsk (GCF), for which the second stage of the tender called to select the General Contractor is ongoing. Only 6% of the Group s investment projects comprise land and other projects scheduled for execution after June 30th OPERATIONS OF THE CAPITAL PARK GROUP IN H In H1 2015, companies of the Capital park Group continued projects launched in previous years and carried out new investment projects. OPERATIONS OF THE CAPITAL PARK GROUP IN H INVESTMENT PROJECTS UNDER CONSTRUCTION As at June 30th 2015, the following projects were under construction: Royal Wilanów a mixed-use project located in the Wilanów district of Warsaw. The project owner is Hazel Investments Sp. z o.o., a subsidiary of Capital Park S.A. It is a five-storey class A office and retail building with a total leasable area of ca. 37,000 m², including 7,000 m² of retail space and nearly 30,000 m² of office space, and a three-storey underground car park with more than 900 parking bays. The project was completed on August 19th Eurocentrum Office Complex Phase 2 (Delta building) an office project located in Warsaw at Al. Jerozolimskie 124/136. The project owner is Dakota Investments Sp. z o.o., a subsidiary of the Company. The second phase of the development is a 15-storey building with more than 27,000 m² of leasable space. Construction commenced in September 2014, with Erbud as the general contractor. The project is scheduled for completion in Q Topos Kraków Pawia an office and service project located in Kraków at ul. Pawia 24. The project owner is Sagitta Investments Sp. z o.o., a subsidiary of the Company. Topos has been conceived as a low-key six-storey building offering in total about 600 m² of leasable space. The project s general contractor is Erbed. Construction work began in the first quarter of 2015, and the project is scheduled for completion in February OTHER MATERIAL EVENTS WITH A BEARING ON THE GROUP S OPERATIONS IN H Acquisition of Capital Park S.A. shares by Members of the Management Board in exercise of rights under the Incentive Scheme, and introduction of the shares to stock exchange trading On January 14th 2015, Marcin Juszczyk and Michał Koślacz, Members of the Management Board, acquired 302,012 Series D ordinary bearer shares each, at the issue price of PLN 1. The shares were acquired in exercise of rights under the Incentive Scheme, pursuant to Resolution No. 5 of the Company s Extraordinary General Meeting of July 28th 2011 on a conditional increase in the Company s share capital, issue of subscription warrants with the existing shareholders pre-emptive rights in respect of the shares to be issued as part of the conditional share capital and the subscription warrants fully waived, and adoption of the Rules of the Incentive Scheme, as amended on September 30th 2013 by virtue of Resolution No. 3 of the Company s Extraordinary General Meeting, pursuant to the statement on exercise of Series A subscription warrants submitted to the registered office of Capital Park S.A. in Warsaw. On February 17th 2015, the Management Board of the Warsaw Stock Exchange passed a resolution to introduce 604,024 Series D ordinary bearer shares to trading on the stock exchange. 79

81 Directors Report on the operations of the Capital Park Group for the first half of 2015 Establishment of pledges over shares in Dakota Investments Sp. z o.o. On January 30th 2015, the Company s subsidiary CP Retail B.V. of the Netherlands, and Bank Polska Kasa Opieki S.A. of Warsaw and PeKaO Bank Hipoteczny S.A. of Warsaw as the pledgees, executed two agreements creating financial and registered pledges over 4,000 shares in Dakota Investments Sp. z o.o., a subsidiary, with a par value of PLN 500 each. First-ranking registered pledges for up to PLN 891,984,000 and EUR 305,960,000 were created to secure the repayment of amounts due to the banks under credit facility agreements executed to finance the purchase and construction of the Eurocentrum Office Complex project. The shares encumbered with the pledges represent 4% of Dakota Investments Sp. z o.o. s share capital, with a total par value of PLN 51,623,000, and confer the right to 4% of total voting rights at the subsidiary s General Meeting. On January 30th 2015, the Company s subsidiary CP Retail B.V. of the Netherlands, and Bank Polska Kasa Opieki S.A. and PeKaO Bank Hipoteczny S.A. executed annexes to the agreements creating pledges over shares in Dakota Investments Sp. z o.o.. Pursuant to the annexes, Capital Park S.A. established pledges over 24,646 shares in Dakota Investments Sp. z o.o., with a par value of PLN 500 each, in favour of Bank Polska Kasa Opieki S.A. First-ranking registered pledges for up to PLN 648,000,000 and EUR 236,800,000 were created to secure the repayment of amounts due to the banks under credit facility agreements executed to finance the purchase and construction of the Eurocentrum Office Complex project. Registration of an increase in Capital Park s share capital On March 3rd 2015, the District Court for the Capital City of Warsaw in Warsaw, 13th Commercial Division of the National Court Register, registered a share capital increase at the Company from PLN 104,744,000 to PLN 105,348,000, made by way of an issue of 604,024 Series D bearer shares, as part of a conditional share capital increase through the exercise of rights attached to 604,024 subscription warrants. CREDIT FACILITY AND LOAN AGREEMENTS New credit facility agreement with PKO BP On March 16th 2015, Capital Park S.A. signed a credit facility agreement with Powszechna Kasa Oszczędności Bank Polski, under which the Company obtained a multi-purpose credit facility of up to EUR 10m to finance investment property purchases. The facility bears interest at a variable rate equal to 3M EURIBOR plus margin or 3M WIBOR plus margin. The final repayment date of the facility is March 15th New credit facility agreement with BOŚ On March 16th 2015, Capital Park Gdańsk Sp. z o.o., a subsidiary of Capital Park S.A., signed credit facility agreements with Bank Ochrony Środowiska S.A., under which the company obtained a credit facility of up to PLN 49.7m to finance the construction of its Neptun House project and a revolving credit facility of up to PLN 1.43m to finance the VAT associated with the investment expenditure. The facilities bear interest at a variable rate equal to 3M EURIBOR plus margin or 3M WIBOR plus margin. The final repayment date of the last tranche is November 30th 2031 in the case of the construction facility and December 31st 2017 in the case of the revolving credit facility. On March 16th 2015, Capital Park Gdańsk Sp. z o.o. executed a revolving credit facility agreement of up to PLN 1,429,715 with Bank Ochrony Środowiska S.A. Pursuant to the agreement, the credit facility is to be repaid by March 31st

82 Directors Report on the operations of the Capital Park Group for the first half of 2015 Amendments to the credit facility agreement and security interests for the Alior Bank facility On March 25th 2015, Diamante Investement Sp. z o.o., a subsidiary of Capital Park S.A., and Alior Bank S.A. signed annex No. 5 to the credit facility agreement of October 24th 2012, changing the facility amount from PLN 28,886 thousand to EUR 6,972 thousand (after conversion of the facility into the euro). The final repayment date for the facility is March 31st On March 31st 2015, the credit facility was converted into an investment credit facility of EUR 6,960.5 thousand. On March 25th 2015, Diamante Investments Sp. z o.o. signed Annex No. 5 to the revolving credit facility executed on October 24th 2012 with Alior Bank S. A., whereby the facility amount was set at PLN 230,000. As at the reporting date, the credit facility was repaid. New credit facility agreement with Alior Bank On April 1st 2015, Oberhausen Sp. z o.o. of Warsaw, a subsidiary of the Company, and Alior Bank S.A. signed a credit facility agreement under which a credit facility was granted to the Company: an acquisition tranche of up to EUR 6,790 thousand for the purchase of a property in Gdańsk, repayable by March 31st 2017; a VAT acquisition tranche of up to EUR 2,231 thousand to finance value added tax on the purchase of the property in Gdańsk, repayable by October 1st 2015; a construction tranche to finance the redevelopment of a building (situated on the property in Gdańsk) of up to EUR 3,208 thousand, repayable by March 31st 2017; a VAT construction tranche to finance value added tax on expenses incurred on the construction project up to PLN 2,000 thousand, repayable by March 31st 2017; an investment tranche (following conversion of the acquisition and construction tranches, not earlier than on June 30th 2016) of up to EUR 9,998 thousand, repayable within five years following the conversion date, with an option to extend this term by another five years upon fulfilment of the conditions set forth in the agreement; a hedging transaction credit limit for EUR/PLN forward contracts, and interest rate hedging related to the credit facility. Interest for each tranche is defined in the Agreement as the WIBOR or EURIBOR rate, as appropriate, plus bank s margin. Amendments to the credit facility agreement with BNP Paribas Bank Polska On April 29th 2015, CP Racławicka Sp. z o.o. and BNP Paribas Bank Polska S.A. signed Annex No. 1 to the credit facility agreement of June 28th Under the annex, the repayment schedule was changed to account for a prepayment. Amendments to the credit facility agreement with Bank Polska Kasa Opieki On June 8th 2015, Dakota Investments Sp. z o.o. and Bank Polska Kasa Opieki S.A. signed Annex No. 6 to the credit facility agreement of June 27th 2012, under which the availability of the facility for the Delta project was extended until March 31st

83 Directors Report on the operations of the Capital Park Group for the first half of 2015 Termination of lease agreements with Raiffeisen-Leasing Polska and execution of credit facility agreements with Hypo Noe Gruppe Bank AG On April 30th 2015, the subsidiaries of the Company, i.e. CP Property sp. z o.o. (SPV1) sp.k. of Warsaw, CP Property Sp. z o.o. (SPV2) sp.k. of Warsaw, CP Property Sp. z o.o. (SPV3) sp.k. of Warsaw, CP Property Sp. z o.o. (SPV4) sp.k. of Warsaw, CP Property Sp. z o.o. (SPV5) sp.k. of Warsaw, and CP Property Sp. z o.o., (SPV6) sp.k. of Warsaw, executed an agreement with Raiffeisen- Leasing Polska S.A. to terminate, with effect from April 30th 2015, finance lease agreements covering 39 commercial properties, which were executed between the subsidiaries and the Bank in 2012 and Under the termination agreement, the Bank agreed to transfer the ownership of/usufruct rights to the properties to the subsidiaries and to release all related security interests upon repayment of all the liabilities owed to it under the lease agreements. On May 21st 2015, the agreement transferring the ownership of/usufruct rights to the properties was executed. On April 30th 2015, the subsidiaries of the Company, i.e. CP Property sp. z o.o. ( SPV1 ) sp.k., CP Property sp. z o.o. ( SPV2 ) sp.k., CP Property sp. z o.o. ( SPV3 ) sp.k., CP Property sp. z o.o. ( SPV4 ) sp.k., CP Property sp. z o.o. ( SPV5 ) sp.k., and CP Property sp. z o.o. ( SPV6 ) sp.k., executed a credit facility agreement with HYPO NOE Gruppe Bank AG of Austria, under which the Bank granted an investment credit facility of up to EUR 26,150 thousand to refinance the existing finance lease liabilities payable by the above subsidiaries to Raiffeisen-Leasing Polska S.A. The facility advanced by HYPO NOE Gruppe Bank AG bears interest based on 3M EURIBOR plus the Bank s margin, and the term of the Credit Agreement is five years. The parties also executed an interest rate risk hedge agreement for a period of five years. ISSUE, REDEMPTION AND REPAYMENT OF EQUITY AND NON-EQUITY SECURITIES Early redemption of part of Series A notes On January 9th 2015, Capital Park S.A. carried out an early redemption of part of notes, i.e. 550,000 Series A bearer notes with a nominal value of PLN 100 per note and a total value of PLN 55,000 thousand. The Company raised cash for the early redemption by way of an issue of Series D notes with a total nominal value of PLN 53,886,000, carried out on December 23rd The notes were redeemed at their nominal value, however the note holders were paid an early redemption premium of 0.5% of the nominal value, i.e. PLN 0.50 before tax, paid for each redeemed note. As at June 30th 2015, the amount to be repaid under the remaining Series A notes was PLN 10m, and the redemption date was July 9th As at the date of this report, the Series A notes had been repaid with the Company s own funds. Interest payments on notes On January 9th 2015, Capital Park S.A. paid interest on Series A notes totalling PLN 2,522,000. On March 23rd 2015, Capital Park S.A. paid interest on Series C notes totalling PLN 768 thousand. On March 23rd 2015, Capital Park S.A. paid interest on Series D notes totalling PLN 846 thousand. Issue of Series E notes On March 18th 2015, Capital Park S.A. issued 111,145 3-year Series E unsecured bearer notes with a nominal value of PLN 100 each, and a total value of PLN 11,115 thousand, maturing on March 18th The notes bear interest at 3M WIBOR plus a margin of 4.3%, payable on a quarterly basis. The purpose of the issue was to secure financing for the Group s day-to-day operations. 82

84 Directors Report on the operations of the Capital Park Group for the first half of 2015 Issue of Series F notes On June 3rd 2015, Capital Park S. A. issued 331,163 3-year Series F unsecured bearer notes with a nominal value of PLN 100 each, and a total value of PLN 33,116 thousand, maturing on June 3rd The notes bear interest at 3M WIBOR plus a margin of 4.3%, payable on a quarterly basis. The purpose of the issue was to secure financing for Capital Park S.A. s day-to-day operations. LOANS ADVANCED IN H In H1 2015, the Group did not advance loans to any non-group entities. SURETIES AND GUARANTEES ISSUED AND RECEIVED IN H On March 25th 2015, Capital Park S.A. signed Annex No. 2 to a surety agreement with Alior Bank S.A. relating to an investment credit facility of November 27th Under the annex, the Company provided a joint and several surety in respect of the PLN 28,886 thousand facility granted by the Bank to Diamante Investments Sp. z o.o. (the Borrower ), a subsidiary of the Company. In accordance with the annex, the surety will remain valid until the Borrower obtains a final occupancy permit and transfers to a designated Assignment Account, for three consecutive months, the full amount of rents and service charges from all tenants (April 2015 is designated as the first month in which this condition is to be satisfied). The total amount of rents and service charges may not be lower than PLN 200,000 per each month. As at June 30th 2015, the conditions for the release of the surety were not met. On June 8th 2015, Capital Park S.A. and Bank Polska Kasa Opieki S.A. of Warsaw signed a cost-overrun coverage guarantee agreement for the Eurocentrum Office Complex project Phase II, providing a joint and several surety in the total amount of PLN 16,350 thousand for the benefit of Dakota Investments Sp. z o.o., a subsidiary of the Company. Pursuant to the agreement, the surety will remain valid until conversion/repayment of the construction credit facility for the Eurocentrum office complex. On June 8th 2015, Capital Park S.A. and Bank Polska Kasa Opieki S.A. signed Annex No. 1 to a surety agreement concerning repayment of an investment credit facility for the Eurocentrum Office Complex project. Under the annex, Capital Park S.A. provided a joint and several surety in a total amount of EUR 3,000 thousand for the benefit of Dakota Investments Sp. z o.o., a subsidiary of the Company. Annex No. 1 increased the surety amount from EUR 1,000 thousand to EUR 3,000 thousand. Pursuant to the annex, the surety will remain valid until the date indicated in the surety agreement, i.e. until the original lender receives confirmation that the DSCR for projects 1 and 2 is at least 1.00 (provided, however, that the surety will not expire before the later of project 1 conversion date or project 2 conversion date), or until March 31st Security deposits received by the Group as at June 30th 2015 and December 31st 2014: Jun Dec Security deposits from tenants 4,816 3,389 Performance bonds from general contractors 943 1,817 83

85 Directors Report on the operations of the Capital Park Group for the first half of 2015 The table below presents material bank guarantees received by the Group as at June 30th 2015: Value Guarantor (PLN 000) Description Alior Bank S.A. 18,535 performance bond covering all monetary and non-monetary obligations of Erbud S.A. under the General Contractor Agreement for the Royal Wilanów project of June 18th 2013, issued in favour of Hazel Investments sp. z o.o. Validity date November 19th 2015 LITIGATION As at June 30th 2015, neither the Company nor its subsidiaries were engaged in any single, or two or more, proceedings pending before a court, arbitration tribunal or administrative authority, concerning liabilities or claims of the Company or its subsidiaries the value of which (related to a single case, or two or more cases jointly) would represent at least 10% of the Company s equity. MATERIAL EVENTS SUBSEQUENT TO THE REPORTING DATE Material events subsequent to June 30th 2015 are presented in Note 28 to the H consolidated annual financial statements of the Capital Park Group. RISK FACTORS AND THREATS The Company s and the Group s approach to risk management reflects its business model and relies on the knowledge and experience of a committed management team. All investment decisions and progress of work on projects are discussed during regular meetings of the Management Board. The risk areas described below and their effective management are also subject to ongoing review by the Internal Control Department and the Audit Committee. Investment decisions which may carry potentially higher risks or which involve considerable resources are also subject to review by the Investment Committee. Given that Capital Park S.A., being the parent of the Capital Park Group, runs its business mostly through subsidiaries, below are presented key risk factors which the Management Board believes to have the strongest bearing on the Group s operations. The list of risks discussed below is neither complete nor exhaustive, and therefore they may not be treated as the only risks to which the Group is exposed. An exhaustive list of the risk factors which the Group considers material is presented in the base prospectus prepared in connection with the PLN 100m public note issue programme, which was approved by the Polish Financial Supervision Authority on November 24th 2014 and published on the Company s website. 84

86 Directors Report on the operations of the Capital Park Group for the first half of 2015 EXTERNAL RISK FACTORS RISK FACTORS POTENTIAL IMPACT RISK MITIGATING MEASURES RISK OF MACROECONOMIC VOLATILITY Deterioration of overall economic conditions globally and in Poland Deterioration of economic conditions in the real property market and property development sector Cyclical nature of the real property market Deterioration of conditions in the financial sector Changes in the Polish financial system ongoing deregulation of open-ended pension funds (OFE) Depreciation of the market value of properties Limited ability to sell properties leading to loss of liquidity Tenants bankruptcies negatively affecting the liquidity position Drop in rents which may be obtained from lease of properties Lower availability of credit Lower demand or no demand for new note issues Higher cost of financing Appropriate selection of portfolio properties. Careful analysis of the location and quality of properties Appreciation of the value of properties through regular repairs and upgrades Choosing strong-brand tenants of sound financial standing. Entering into agreements with chain tenants and reputable institutions Using diversified sources of debt financing Diversification of financing sources and fostering good relations with leading financial institutions Adding dividends and property management fees to income sources Fluctuations in foreign exchange rates, in particular the EUR/PLN exchange rate Interest rates going up Interest rates going down Actions by competitive companies Actions by local private investors FOREIGN EXCHANGE RISK Lower proceeds from sale of properties as expressed in PLN Lower rental income A drop of the EUR/PLN exchange rate leads to a decrease in the carrying amounts of real properties INTEREST RATE RISK Increase in debt service costs caused by an increase in interest rates Higher yields (decrease in the value of properties owned by the Group). Yields are strongly correlated with the risk free rates and may grow along with an increase in interest rates Opposite situation: a decline in yields as a result of a decrease in interest rates pushing up the prices of properties that the Group wants to purchase COMPETITION RISK Drop in rents and selling prices of properties More unoccupied space/units Increase in prices and costs of purchase of properties Investment process becoming longer and more difficult The use of natural hedging by matching the lease currency with the credit facility currency. However, given the fact that EUR is the base currency in which the properties are valued, and the balancesheet hedging is not full, the Group has and will continue to have an exporter s profile. It is not possible to fully eliminate the foreign exchange risk Limited use of derivative instruments available on the market Pursuing a long-term management strategy with respect to incomegenerating assets Continuous monitoring of the real property market and economic situation, and fine-tuning the adopted strategy Use of interest rate swaps. Such transactions, however, do not cover 100% of the exposure. The degree of exposure coverage is a compromise between lower risk and higher cost Careful selection of properties and taking advantage of opportunities emerging with respect to distressed assets Building on experience in project execution and knowledge of the market to implement unique projects Leveraging the Group s financial and organisational potential Active property management Development of unique concepts that distinguish the Group s projects from 85

87 Directors Report on the operations of the Capital Park Group for the first half of 2015 competition, including the Office Plus and Make Stories not Stores concepts. RISK FACTORS RELATED TO THE PROPERTY PORTFOLIO RISK FACTORS POTENTIAL IMPACT RISK MITIGATING MEASURES RISK RELATED TO LOSS OF TENANTS Loss of income and liquidity due to: Careful choice of tenants Loss of office or retail space tenants, or difficulties in finding such tenants Failure to acquire tenants for office space in Warsaw in connection with large oversupply Loss of anchor tenant Lower rental income Inability to sell properties Inability to raise bank financing Cooperation with reputable external firms specialising in real property agency services Attractive offering for tenants Regular monitoring of tenants satisfaction and taking remedial action Using deposits and bank guarantees as security under lease agreements Decrease in the value of properties recognised as a loss on revaluation Adoption of erroneous assumptions leading to misvaluation of properties and implementation of wrong strategies for a given project RISK RELATED TO PROPERTY VALUATION Lower than expected income from rents and sale of properties Carrying amount of properties that fails to reflect their fair value Cooperation with independent property appraisers Careful choice of valuation methods Valuation approval procedure consisting of several stages Regular reviews of properties and monitoring of key assumptions Exceeding the budget Failure by general contractors to meet the agreed quality standards and deadlines Failure to obtain occupancy permits RISK RELATED TO PROJECTS UNDER CONSTRUCTION Development margin erosion Project delays leading to reduced rental income Breach of covenants under bank financing agreements Emergence of claims Cooperation with reputable contractors of sound financial standing Security mechanisms included in general contractor agreements Ongoing monitoring and supervision of construction work by building inspectors or specialised external firms Negative impact on the Group s image and ability to lease space Recruiting experienced specialists Experience in property development projects and ongoing monitoring of the progress of work Sluggish activity of Polish government authorities and offices Actions by non-governmental organisations or owners of neighbouring properties and local residents Lack of local zoning plans RISK RELATED TO ADMINISTRATIVE PROCEDURES Failure to receive or delayed receipt of permits and decisions, leading to delays in or abandonment of investment projects Prolonged process of obtaining permits reducing profitability of investment projects Revocation of permits Drawing on experience in going through administrative procedures Recruiting specialists in numerous areas, including finance, law, construction and administrative procedures 86

88 Directors Report on the operations of the Capital Park Group for the first half of 2015 FEASIBILITY OF INVESTMENT PLANS At present, most of the operating activities of the Capital Park Group are carried out by the Company s subsidiaries and jointlycontrolled entities. In line with the policy adopted by the Group to finance its operations, funding from banks is secured by individual SPVs, responsible for separate investment projects. This strategy allows the Group to mitigate the risk exposure of other projects and the general business risk attributable to potential risks involved in individual projects. In 2015, the Capital Park Group will mostly incur investment expenditure on projects in Warsaw (Eurocentrum Delta building, Royal Wilanów, ArtN) as well as projects in Kraków and in Gdańsk. Eurocentrum Delta building On September 4th 2014, an agreement was signed with general contractor Erbud S.A. concerning execution of the second phase of the Eurocentrum Office Complex project the Delta building. The agreement provides for completion of construction work in the fourth quarter of On December 19th 2014, Dakota Investments Sp. z o.o. and Bank Polska Kasa Opieki S.A. executed an annex to the credit facility agreement of June 27th 2012, under which the Bank extended the scope of the credit facility agreement to include the financing of the construction of Phase 2 of the Eurocentrum Office Complex. The facility had not been disbursed by the date of this Director s Report. The first tranche of the facility is scheduled to be disbursed by the end of August Royal Wilanów Investment expenditure in 2015 will be incurred mostly on construction work conducted by the general contractor (Erbud S.A.) and interior design of the leasable areas. Construction work is expected to be completed in the middle of August 2015, while the interior design work will continue until the end of 2015 and in subsequent years. On July 7th 2015, Hazel Investments Sp. z o. o., a subsidiary of the Company, and Erbud S.A., a construction company, signed an annex amending the agreement on general contractor services related to the Royal Wilanów project. The annex to the Agreement defines the scope of additional, substitute, and cancelled works, providing for an additional fee payable to the general contractor in the lump-sum amount of PLN 2,887m. On June 30th 2014, the first tranche of the construction loan under the credit facility agreement of June 29th 2012 between Hazel Investments Sp. z o. o., a subsidiary of the Company, and PKO BP S.A. was disbursed to be used for payment of amounts due to the general contractor and subcontractors. ArtN The procedure to select the general contractor for the construction of the ArtN project was initiated early in Activities planned as part of the project execution process in 2015 will include negotiations with construction companies and then preparation of the working plans and specifications. Topos building in Kraków retail and office space Upon execution of the general contractor agreement with Erbet on January 30th 2015, construction work started on the building located in ul. Pawia in Kraków, comprising retail and office space. The building will have a total area of approximately 600 m 2. Investment expenditure on the construction process will amount to more than PLN 5m and will be covered with the Company s own funds. Construction work is scheduled for completion in February

89 Directors Report on the operations of the Capital Park Group for the first half of 2015 The Group strives to have sufficient funds and available bank borrowings, and takes steps to secure financing on the best terms achievable at a given time. In the Management Board s opinion, the Group is well-positioned to receive financing for its future investment projects. Thanks to its reputation and a proven track-record, the Group has access to a number of financial institutions and diversified sources of financing. 4 STATEMENT OF COMPLIANCE WITH CORPORATE GOVERNANCE STANDARDS The set of corporate governance principles applicable to Capital Park S.A. is provided in the Code of Best Practice for WSE Listed Companies attached as an appendix to WSE Supervisory Board Resolution No. 12/1170/2007 of July 4th 2007 concerning the adoption of the Code of Best Practice for WSE Listed Companies, as laid down by WSE Supervisory Board Resolution No. 17/1249/2010 of May 19th 2010, amended by WSE Supervisory Board Resolution No. 20/1287/2011 of November 19th 2011 and WSE Supervisory Board Resolution No. 19/1307/2012 of November 21st The consolidated text of the Code of Best Practice for WSE Listed Companies as applicable to the Company in 2014 is attached as an appendix to WSE Supervisory Board Resolution No. 19/1307/2012 of November 21st The document is available on the website of the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.) at Since the admission of Company shares to trading on the main market of the WSE, the Management Board has complied with all corporate governance principles stipulated in the Code of Best Practice for WSE Listed Companies, except the following: i) Recommendation I.5 where it refers to having in place a remuneration policy and rules of defining the policy. The Company does not have in place a remuneration policy for the Supervisory Board and Management Board members or rules of defining the policy. The Company is considering the possibility of establishing such policy and rules in the future. ii) Recommendation I.9 where it refers to ensuring a balanced proportion of women and men in management and supervisory functions in companies. As at the date of this statement of compliance, the Company does not ensure a balanced proportion of women and men on its Management Board and Supervisory Board. There are no women among the four members of the Management Board. There are two women among the six members of the Supervisory Board, however, the Company cannot give any assurance that this proportion will be maintained in the future. Although the Company endorses the recommendation, it should be noted that the Supervisory Board s composition is determined by the shareholders at the General Meeting. The Company has a policy of employing competent and creative individuals with appropriate professional experience and educational background. iii) Recommendation I.12 where it refers to enabling the shareholders to exercise their right to vote during a General Meeting, either in person or through a proxy, from a location other than the venue of the General Meeting, using electronic communication means. Currently, the Company s Articles of Association do not contain provisions that would enable the Company shareholders to participate in a General Meeting using electronic communication means. Considering the provisions of Art of the Polish Commercial Companies Code, stating that companies may enable shareholders to participate in a General Meeting with the use of electronic communication means only when their Articles of Association provide for such an option, the Company cannot enable its shareholders to participate in a General Meeting using real-time electronic communication. Another reason why the Company does not comply with the above recommendation is the excessively high cost of procurement of the appropriate 88

90 Directors Report on the operations of the Capital Park Group for the first half of 2015 equipment and technical capabilities that would allow the Company to fulfil the tasks imposed by the recommendation, which is incommensurate with the potential benefits to the shareholders. iv) Recommendation IV.10 where it refers to enabling shareholders to participate in a General Meeting using means of electronic communication through: 1) real-time broadcast of General Meetings, 2) real-time two-way communication where shareholders may take the floor during a General Meeting from a location other than the General Meeting. The Company does not comply with the above recommendation because of the excessively high cost of procurement of the appropriate equipment and technical capabilities that would allow the Company to fulfil the tasks imposed by the recommendation, which is incommensurate with the potential benefits to the shareholders. The Articles of Association provide that candidates to the Supervisory Board and members of the Supervisory Board are obliged to submit, promptly after being appointed, a written statement to the Company to the effect that they meet the independence criteria under Annex II to the Commission Recommendation of February 15th 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board, and advise the Company promptly if their status changes during the Supervisory Board s term of office. In 2014, the Management Board decided to comply with the corporate governance recommendation provided for in Section II.1.9a of the Code of Best Practice for WSE Listed Companies, which refers to recording the General Meeting in audio format and making such recording available from the Company s website. The recommendation will be implemented as of the next General Meeting. Where the implementation of a corporate governance principle requires amendments to the Company s corporate documents (Articles of Association, Rules of Procedure for the Management Board, Rules of Procedure for the Supervisory Board, Rules of Procedure for the General Meeting), the Management Board will take steps necessary to ensure that such amendments are made. The Management Board also intends to recommend to the Supervisory Board and the General Meeting compliance with all principles of the Code of Best Practice for WSE Listed Companies, except as specified above. Importantly, the decision whether or not to comply with certain principles stipulated in the Code of Best Practice for WSE Listed Companies will be made by the Company shareholders and the Company s Supervisory Board. 5 SHARE CAPITAL AND SHAREHOLDERS SHAREHOLDERS As at June 30th 2015, the Company s share capital was divided into 105,348,131 shares with a par value of PLN 1 per share, including: 1) 100,000 Series A ordinary registered shares, 2) 71,693,301 Series B ordinary registered shares, 3) 20,955,314 Series C registered shares, 4) 604,024 Series D shares, 5) 9,230,252 Series E registered shares, 89

91 Directors Report on the operations of the Capital Park Group for the first half of ) 2,765,240 Series F registered preference shares, each carrying two votes at the Company s General Meeting. The table below presents shareholders with large holdings of Company shares as at the date of this Report. Shareholder Number of shares % ownership interest Number of voting rights % of total voting rights CP Holdings S. à r. l. 77,359, % 77,359, % Jan Motz 2,805, % 5,571, % Other 25,182, % 25,182, % Total 105,348, % 108,113, % SHARES HELD BY MEMBERS OF THE MANAGEMENT AND SUPERVISORY BOARDS At June 30th 2015, the numbers and total par value of shares held by members of the Management Board were as follows: Number of shares Par value [PLN 000] Jan Motz 2,805,943 2,806 Jerzy Kowalski 2,792,707 2,793 Michał Koślacz 320, Marcin Juszczyk 302, On January 14th 2015, Marcin Juszczyk and Michał Koślacz exercised their rights under subscription warrants by acquiring 302,012 Series D shares each, at the nominal price of PLN 1 per share. On March 3rd 2015, Series D shares were registered with the National Court Register. As a result, the Company s share capital was increased from PLN 104,774,107 to PLN 105,348,131, by way of an issue of 604,024 Series D ordinary bearer shares, as part of a conditional share capital increase through the exercise of rights attached to 604,024 subscription warrants. As at June 30th 2015, members of the Management Board did not hold directly any shares in any of the SPVs of the Capital Park Group. As at June 30th 2015, members of the Supervisory Board did not hold shares in Capital Park S.A. or in other Group entities. 6 FACTORS AND EVENTS, IN PARTICULAR OF NON-RECURRING NATURE, WITH A MATERIAL EFFECT ON FINANCIAL PERFORMANCE In the first half of 2015, there were no non-recurring factors or events that could have affected the Group s financial performance. The Capital Park Group s performance in Q was strongly affected by a weakening of the EUR/PLN exchange rate. The EUR/PLN exchange rate was as at December 31st 2014 and at the end of Q This decrease, translating into a more than PLN 26m loss on valuation of property (2% decrease in the exchange rate vs property value of PLN 1.7bn), was due to the fact that the value of investment properties is predominantly measured in the euro as the rents on which such measurement is based are also denominated in the euro. As a result, any fluctuations in the EUR/PLN rate generate gains in those quarters in which the EUR/PLN exchange rate strengthens and a loss in those in which the exchange rate weakens. 90

92 Directors Report on the operations of the Capital Park Group for the first half of SEASONAL AND CYCLICAL CHANGES IN THE BUSINESS OF CAPITAL PARK S.A. The Group s business is not subject to any significant seasonal or cyclical fluctuations. 8 ISSUE, REDEMPTION AND REPAYMENT OF EQUITY AND NON-EQUITY SECURITIES None. 9 DIVIDEND PAID OR DECLARED In the first half of 2015, the Company did not pay or declare any dividend. 10 MANAGEMENT BOARD S POSITION ON THE FEASIBILITY OF MEETING PREVIOUSLY PUBLISHED ANNUAL PROFIT FORECASTS The Management Board did not publish or declare to publish any financial forecasts. 11 OTHER INFORMATION WHICH IS, ACCORDING TO THE COMPANY, MATERIAL FOR THE ASSESSMENT OF THE STAFFING LEVELS, ASSETS, FINANCIAL STANDING AND FINANCIAL PERFORMANCE, OR CHANGES IN ANY OF THE FOREGOING, AND INFORMATION MATERIAL FOR THE ASSESSMENT OF THE COMPANY S ABILITY TO FULFIL ITS OBLIGATIONS None. 12 FACTORS WHICH, IN THE COMPANY S OPINION, WILL AFFECT THE COMPANY S PERFORMANCE IN THE NEXT QUARTER, OR IN A LONGER TERM None. Warsaw, August 25th 2015 SIGNATURES OF MEMBERS OF THE MANAGEMENT BOARD OF CAPITAL PARK S.A. Jan Motz President of the Management Board Jerzy Kowalski Member of the Management Board Marcin Juszczyk Member of the Management Board Michał Koślacz Member of the Management Board 91

93 Directors Report on the operations of the Capital Park Group for the first half of