Annual Report • Dec 31, 2017
Annual Report
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| Introduction | 3 |
|---|---|
| 2. Executive Chairman's Statement | 3 |
| 3. Understanding AFI Development | 8 |
| 3.1 Group Structure8 | |
| 3.2 Our strategy9 | |
| 3.3 Our project portfolio10 | |
| 3.4 Board of Directors | 23 |
| 3.5 Management team 24 |
|
| 4. Operational review | 25 |
| 4.1 Market Update 2017 25 |
|
| 4.2 Project-specific activities and update |
26 |
| 5. Principal business risks and uncertainties affecting the Company | 32 |
| 6. Corporate Governance and compliance with the UK Listing Rules | 37 |
| 6.1 Compliance with the UK Listing Rule 9.2.2AR | 37 |
| 6.2 Compliance with the UK Corporate Governance Code37 | |
| 6.3 Financial reporting and the 'going concern' basis for accounting | 38 |
| 6.4 Viability Statement 38 |
|
| 6.5 Working processes at the Board of Directors |
38 |
| 6.6 Risk Management Processes and internal control | 44 |
| 7. Directors' remuneration report | 48 |
| 8. Non-financial statement | 51 |
| 9. Financial Statements |
53 |
| 9.1 Management discussion and analysis of financial condition and results of operations53 |
|
| 9.2 Management Report and Directors Responsibility Statement | 64 |
| 9.3 Consolidated Financial Statements |
69 |
| 9.4 Parent Company Separate Financial Statements |
127 |
| 9.5 Independent Auditors' Report |
149 |
AFI Development Plc ("AFI Development" or "the Company") is one of the leading real estate development and investment groups focused mainly on the Russian market.
Incorporated in Cyprus in 2001, AFI Development builds large scale, integrated and high profile commercial and residential properties to international standards.
Following the Company's listing on the Main Market of the London Stock Exchange in 2007, AFI Development became the first real estate development company operating in Russia to attain a premium listing in 2010.
AFI Development aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction and quality of customer service.
The Company focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow as its main market. AFI Development's existing portfolio comprises commercial projects focused on offices, shopping centers and hotels, as well as residential projects and mixed-use properties. The Company's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favorable return.
This document may contain "forward-looking statements" with respect to the Company's financial condition, results of operations and business and certain of the Company's plans and objectives.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "will", "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates." By their nature, forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following:
Any written or oral forward-looking statements, made in this document or subsequently, which are attributable to the Company or any persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realized. Subject to compliance with applicable law and regulations, the Company does not intend to update these forward-looking statements and does not undertake any obligation to do so.
For the Russian economy in general, 2017 was a year of stabilisation as inflation fell to rates not seen in years (2.51%, Rosstat) and oil prices settled at a comfortable level. The Russian Central Bank has been gradually reducing the key lending rate (currently 7.25%), however it remains high relative to inflation. In 2017 the Russian economy returned to growth, though at modest rates (1.33% according to the World Bank).
For AFI Development, the year was marked by launch of construction and sales at two additional residential projects in Moscow, the Botanic Garden and Bolshaya Pochtovaya, bringing the number of actively constructed residential projects to four. The sales of residential and parking units now play a significant role in our revenue generation alongside the revenue accrued from rent and hotel operations.
This past year we made significant progress at our Odinburg development where we delivered Building 2 and began the construction and pre-sale of Building 6 and Building 3. At AFI Residence Paveletskaya we are also preparing to deliver the first apartments to customers in several completed buildings. Meanwhile at the Botanic Garden and Bolshaya Pochtovaya projects, construction and pre-sale remain on schedule.
Revenue for the Company in 2017 grew by 30% year-on-year to US\$179.1 million, supported by strong residential sales while gross profit increased by 24% to US\$ 61 million.
Our yielding properties performed well throughout 2017, with strong figures from our flagship project, the AFIMALL City, which generated US\$ 81.8 million in revenue, up 24% from the prior year. Our hotels also demonstrated good performance, accruing US\$ 29.3 million in revenue.
Looking ahead to 2018, we expect further stabilisation in the Russian macroeconomy. As demand for commercial real estate registers a slow improvement, we will continue to adapt our strategy to ensure the sustainable growth of our business in the future.
As at 31 December 2017, based on the Jones Lang LaSalle LLC ("JLL") independent appraisers' report and on accounting book value of properties, the value of AFI Development's portfolio of investment properties stood at US\$0.82 billion, while the value of the portfolio of investment property under development stood at US\$0.16 billion.
Consequently, the total value of the Company's assets, mainly based on independent valuation as of 31 December 2017, was US\$1.42 billion, compared to US\$1.44 billion as at 31 December 2016.
For additional information, please refer to the "Portfolio Valuation" section in the Management Discussion and Analysis (the "MD&A").
We ended 2017 with approximately US\$106.0 million of cash, cash equivalents and marketable securities on our balance sheet and a debt1 to equity level of 75%. This position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.
Our financing strategy aims to maximise the amount of debt financing for projects under construction, while maintaining healthy loan-to-value levels. After delivery and commissioning, we aim to refinance the properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.
For additional information, please refer to the "Liquidity" section of the MD&A.
Following the year-end the following key events occurred:
During 2017 our flagship project, AFIMALL City, demonstrated solid growth in footfall, revenue and NOI.
Average daily footfall in December 2017 was 18% higher than in December 2016, reflecting improved consumer sentiment and continued development of the Moscow City area (such as improving transportation infrastructure and the opening of new office space).
1 Debt includes all loans and borrowings. For further details please see note 26 to the Financial Statements.
Revenue grew 24% year-on-year (US\$ 81.8 million for 2017) and NOI increased 26% year-onyear (US\$62.1 for 2017). Occupancy stood at 89% at the end of 2017
A number of new retailers entered the mall during the past year including: Gulliver and Reima children goods outlets, Otto Berg men's fashion, a large fragrance and beauty shop "Golden Apple" and Tumi travel accessories.
The project saw a significant turnaround in 2017: following a major lease agreement with Deutsche Bank in July, the Company agreed to dispose of buildings 2 and 4 to one of the leading Russian banks for RUR7.89 billion (circa US\$135 million) in November 2017. The transaction was successfully completed in February 2018.
The Company currently owns one remaining building in the complex (GBA 18,805 sq.m including underground parking), which is leased to Deutsche Bank, Brown-Forman and other tenants.
Following the restructuring of the loans of Aquamarine III and of AFIMALL City with VTB Bank PJSC, the loan at Aquamarine III has been fully repaid in January 2018.
AFI Development's hospitality portfolio, which consists of one Moscow city-hotel (Aquamarine) and two resorts in the Caucasus mineral waters region (Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk), performed well in 2017. The Plaza Spa Kislovodsk project has been fully owned by AFI Development since February 2017 following the acquisition of the remaining 50% stake.
At Odinburg, construction work and marketing continued throughout the year. Building 2 of Phase 1 was delivered in the third quarter of 2017. Construction of Building 6 (phase II) started in the second quarter, while the construction of Building 3 (phase I) – in the third quarter. Currently, the Company actively markets Building 2 (completed apartments), Building 6 and Building 3 (presales). As of 10 April 2018, the number of signed sale contracts amounted to 676 (96% of total) in Building 2, 144 (64% of total) in Building 6 and 134 (14% of total) in Building 3.
In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units" 2 began simultaneously with the onset of construction and the project continues to be marketed as "AFI Residence Paveletskaya".
In 2017, construction work and marketing at AFI Residence Paveletskaya proceeded according to schedule. As of 10 April 2018, 404 residential unit pre-sale contracts (63% of units under presales) were signed.
The Company is preparing to initiate the delivery of apartments to customers in the beginning of Q2 2018.
2 At AFI Residence Paveletskaya there are two types of residential units: fully residentially zoned units referred to as "apartments" and commercially zoned units that, according to common market practice in Russia, are sold and referred to as "special units" and can be used for permanent residence.
The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya. During 2017, the construction and marketing of the projected progressed according to plan and as of 10 April 2018, 105 apartments (54% of Phase I) had been pre-sold to customers.
The main construction phase and pre-sale of apartments at Botanic Garden began in Q1 2017 with the development and marketing of the project progressing as expected. As of 10 April 2018, 142 apartments (18% of Phase I) had been pre-sold to customers.
In Q2 2017, the Company obtained development rights for the project, which has been approved for development by the Moscow constructions authorities as a "recreational centre" with a gross buildable area of 22 thousand sq.m.
The Directors of AFI Development as at the date of publication of this report are as set out below:
Mr Lev Leviev, Executive Chairman of the Board Mr Panayiotis Demetriou, Senior Non-Executive Independent Director
Mr David Tahan, Non-Executive Independent Director
Lev Leviev, Executive Chairman
In this section we provide an overview of AFI Development Group's structure, our operations and development projects.
AFI Development PLC acts as a holding company for the Group's investments in subsidiaries, usually structured as special purpose vehicles set up to develop and operate particular projects, and joint ventures, when applicable. The majority of our real estate projects are managed by our operating subsidiary, AFI RUS LLC, which acts as a management company for the Russian subsidiaries and for the branches of international subsidiaries. Stroyinkom-K LLC is another important operating company in the Group and serves as project manager for most of the Group's Russian projects under development. It is a Russian company licensed to perform various technical and supervisory functions in the development and construction process, which is heavily regulated in Russia.
AFI Development Hotels Limited is a subsidiary which operates the Company's hospitality projects.
AFI Ukraine Ltd. is a dedicated subsidiary holding stakes in the Company's projects in the Ukraine.
A list of significant subsidiaries of AFI Development PLC can be found in Note 32 to the consolidated financial statements. A simplified structure of the AFI Development Group is presented in the Exhibit 1 below (this is not a legal structure, it is intended to illustrate how the Company's holding structure and operations are organised):
Exhibit 1: Simplified structure of the AFI Development Group
AFI Development is focused on developing and redeveloping high quality, integrated, large-scale, commercial and residential real estate assets including offices, shopping centres, hotels, mixeduse properties and residential projects. As part of our strategy, we aim to sell the residential units we develop and to lease the commercial properties, whilst not excluding opportunistic sales of select developments. We are committed to growing our high quality income-generating real estate portfolio.
Moscow is a rapidly expanding city; AFI Development has been part of this expansion for the last ten years and aims to develop projects that meet the needs of a growing, global city, creating new urban environments.
In addition to their large scale and high complexity, our projects are regenerative for their local environments and involve significant improvements to existing infrastructure. As such, we aim to enhance the overall value of the neighbourhoods we enter, creating more comfortable living and working conditions.
During our years of successful operations in Moscow, we have worked closely with the City authorities who have long recognised the high value-added nature of our projects. We have every confidence in our continued successful cooperation with the authorities going forward.
Our experienced management team, with strong knowledge and a proven track record of operating in the Russian market, aims to maintain a diversified portfolio whilst using a flexible, phased development approach. This allows us to leverage its development platform and complete projects on a cost-efficient basis, whilst also resulting in cash-generation at the earliest possible opportunity.
The high quality of our developments enables us to attract international and local tenants on favourable terms. To ensure high retention rates, we aim to sign leases of increasing length and place greater emphasis on on-going tenant relations.
Our expectation for the medium to long-term is that the Moscow real estate market will continue to offer a high volume of business activity and robust development potential due to its size, its position as the largest financial centre in Russia and as one of the largest capital cities in Europe. We believe that the current macroeconomic headwinds are temporary and do not change our view on the long-term fundamental strength of the Moscow market. We plan to maintain our development focus in Moscow, with expectations of further market improvement. At the same time, we will continue to review our land bank outside of Moscow and reactivate select projects based on availability of financing and strength of demand.
AFIMALL City is a retail and entertainment development, located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of 275,046 sq.m (including parking), and GLA of 107,208 sq.m, the project has a shopping gallery of nearly 460 shops and an 11-screen movie theatre with a number of additional outstanding leisure and dining facilities. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience.
AFIMALL City has direct underground access from three metro stations (Vystavochnaya, Mezhdunarodnaya, Delovoy Tsentr) and from the Third Transportation Ring. A railway station "City" of the new circular rail line was opened in 2016 and is also in close vicinity to the AFIMALL.
| Type | Retail |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 275,046 |
| GLA, (sq.m) | 107,208 |
| Parking, units | 2,022 |
| Valuation by JLL as at 31.12.2017 (US\$ million) |
696.0 |
| Status | Yielding |
Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the heart of the historical Zamoskvorechie district of Moscow. The project consists of four Class A buildings with common underground parking and creates attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics "Aquamarine III" sets new standards for quality and an aspirational environment among Moscow's commercial developments. The project is located within the Garden Ring, and is served by two metro stations. In 2013, AFI Development disposed of Building 1 in the complex to ALROSA mining company, while in 2017 Buildings 2 and 4 were disposed to a large Russian bank.
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| Type | Office |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 18,805* |
| GLA, (sq.m) | 13,622 |
| Parking, units | 199 |
| Valuation by JLL as at 31.12.2017 (US\$ million)* |
63.2 |
| Status | Leased to tenants |
| Type | Office, business park |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 7,910 |
| GLA, (sq.m) | 6,928 |
| Parking, units | 105 |
| Valuation by JLL as at 31.12.2017 (US\$ million) |
11.9 |
| Status | Yielding |
The project comprises completed reconstruction of four Class B+ office buildings, which form a gated business park. The project is located in central Moscow, between the Garden Ring and the Third Transportation Ring, and is within walking distance of the Kievskaya transportation hub.
During 2017 the Company consolidated 100% of the property after exchanging part of the buildable area for a partner's share in the project company.
The Paveletskaya I office complex comprises a reconstructed Class B building. It is located in close vicinity to the AFI Residence Paveletskaya residential complex.
The project comprises a Class B office building reconstructed around the frame of a former administrative building. It is located in a dynamically developing business area on the border of Moscow's Central and Southern Administrative Districts. It is located in close vicinity to the AFI Residence Paveletskaya residential complex.
| Type | Residential |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 828,610 |
| GSA residential/ GSA commercial/ GLA shopping centres, (sq.m) |
461,000/ 19,560/16,800 |
| Parking, units | 4,563 |
| Book value * | 108.8 |
| Status | Construction |
* Odinburg is an asset of the Trading properties under development and Trading property category and presented in the Financial Statements at net realizable value. Trading property under development is represented by accumulated cost of construction less impairment and comprises US\$100.05 million. Trading property is represented by completed apartments, parking places and offices of Buildings 1 and 2 and comprises US\$8.77 million
Odinburg is located in the town of Odintsovo in the Moscow region (11 km west of Moscow). The entire residential district takes up an area of 33.14 hectares. The development is planned to include multi-functional infrastructure comprising two schools, two kindergartens, a medical centre and other facilities.
The project involves the construction of a multi-storey residential micro district consisting of two phases:
Each phase includes commercial premises on ground floors that are planned to be sold to end users. In addition, the project envisages stand-alone shopping centres with areas to be leased to tenants.
| Type | Residential |
|---|---|
| Company share | 99.18% |
| GBA, (sq.m) | 135,262 |
| GSA residential/ GSA commercial (sq.m) |
62,011/ 17,340 |
| Parking, units | 1,085 |
| Book value, (US\$ million) * | 115 |
| Status | Construction |
* AFI Residence Paveletskaya is an asset of the Trading properties under development category and presented in the Financial Statements at cost.
Paveletskaya Phase II is a modern residential complex in proximity to Moscow city centre on Paveletskaya Embankment. The project is located in Danilovsky subdistrict (the South Administrative district of Moscow), between the Garden ring and the Third Transportation Ring and is easily accessible by private or public transport. The property is currently under construction. The property is being marketed under the brand "Residence of Composers".
Part of the commercial area of the project is designated as "special units". These "special units" are premises not legally zoned for housing, but, according to common practice on the Russian market, are widely sold for residence (a person cannot register in this address, but the premises can be used for housing). The prices of "special units" are normally lower than that of similar apartments (zoned housing units).
The project consists of three phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 52,928 sq.m and total General Sellable Area (GSA) of 31,306 sq.m. This phase is planned to include 175 apartments, 220 special units and 6,095 sq.m of flexible commercial space.
Phase II – is planned to have GBA of 51,839 sq.m and total GSA of 27,593 sq.m. This phase is planned to include apartments and 1,403 sq.m of flexible commercial space.
Phase III – is planned to have GBA of 30,495 sq.m and total GSA of 20,452 sq.m. This phase is planned to include apartments and 9,842 sq.m of flexible commercial space.
| Type | Residential |
|---|---|
| Company share | 99.71% |
| GBA, (sq.m) | 136,581 |
| GSA residential / GSA commercial, (sq.m) |
52,941/31,974 |
| Parking, units | 666 |
| Book value, (US\$ million)* | 84.3 |
| Status | Construction |
* Bolshaya Pochtovaya is an asset of the Trading properties under development category and presented in the Financial Statements at cost.
Bolshaya Pochtovaya is a mixed-use project (predominantly residential) on a land area of 5.65 hectares. The development is located in the Central Administrative district of Moscow. The land plot borders the Yauza river, which significantly enhances the views from the project. The project is located in an attractive neighbourhood, which benefits from developed social infrastructure: transport, shops and cultural/leisure amenities. The main construction phase was launched in March 2017 and the property is being marketed under the brand, "Residence of Architects".
The project will include 11 residential buildings, 4 stand-alone commercial buildings, 2 levels of underground parking and a kindergarten. The construction will be realised in four phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 40,788 sq.m and total General Sellable Area (GSA) of 25,969 sq.m. This phase is planned to include apartments, 8,578 sq.m of flexible commercial space and a kindergarten.
Phase II – is planned to have GBA of 37,373 sq.m and total GSA of 21,483 sq.m. This phase is planned to include apartments and 3,382 sq.m of flexible commercial space.
Phase III – is planned to have GBA of 35,629 sq.m and total GSA of 22,719 sq.m. This phase is planned to include apartments and 2,953 sq.m of flexible commercial space.
Phase IV – is planned to have GBA of 22,792 sq.m and total GSA of 14,744 sq.m. This phase is planned to include apartments and 1,002 sq.m of retail space.
Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow. It is approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira and within walking distance to Botanichesky Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building area (GBA) of 206,356 sq.m.
| Type | Residential |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 206,356 |
| GSA residential / GSA commercial, (sq.m) |
111,105/8,842 |
| Parking. units | 794 |
| Book value (US\$ million) * | 50. 4 |
| Status | Construction |
* Botanic Garden is an asset of the Trading property under construction category and presented in the Financial Statements at net realizable value.
The project will include several residential buildings with ground-floor commercial space, two levels of underground parking and will be realised in two phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 138,221 sq.m and total General Sellable Area (GSA) of 73,877 sq.m. This phase is planned to include apartments and 8,402 sq.m of flexible commercial space.
Phase II – is planned to have GBA of 68,135 sq.m and total GSA of 46,070 sq.m. This phase is planned to include apartments and 440 sq.m of flexible commercial space.
| Type | Office |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 50,220 |
| GLA, (sq.m) | 37,035 |
| Parking, units | 467 |
| Valuation by JLL as at 31.12.2017 (US\$ million) |
66.3 |
| Status | Developme nt stage |
The project is a class A office complex located at 50/2, 2nd Brestskaya street, Moscow. One of the key attractions of this project is the excellent access both by public and private transportation, and its location in a well-developed and established business district. It lies in close proximity to Four Winds Plaza and other class A office properties in the well-developed office area between the Garden Ring and Belorussky railway station.
The project is located at the Tverskaya Zastava square, near the Belorussky railway station.
In Q2 2017, the Company obtained development rights for the project, which has been approved for development by the Moscow construction authorities as a "recreational centre" with a gross buildable area of 22 thousand sq.m.
Plaza II is a retail-entertainment development project envisaging construction of a 7-storey building with one underground level and a total GBA of 22,000 sq.m, providing 14,000 sq.m of Gross Leasable Area.
| Type | Offices |
|---|---|
| Company share | 100%* |
| GBA, (sq.m) | 108,000 |
| GLA, (sq.m) | 61,350 |
| Parking, units | 1,210 |
| Valuation by JLL as at 31.12.2017 (US\$ million) * |
67.0 |
| Status | Development stage |
*The Company had 100% in the project as of 31.12.2017. The 5% share was purchased by the Company from its partner in March 2017.
Plaza IV development project is located two hundred meters from Tverskaya Zastava square at 11 Grouzinsky Val, Moscow. The project comprises a major office development with a supporting retail zone on the ground floor.
Kossinskaya is a mixed-use building with nine above ground floors and a single underground level. The property was initially constructed in 2005.
| Type | City-hotel |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 8,848 |
| Number of rooms | 159 |
| Status | Operating |
The four-star hotel, which offers a full range of business and leisure facilities, is located in the historical centre of Moscow, near the Kremlin, and forms part of AFI Development's major Ozekovskaya Embankment mixed-use development.
* 50% in the project were purchased by the Company from its partner in February 2017, the current share is 100%.
Plaza Spa Hotel in Kislovodsk is a four star hotel located on a 1.5 hectare land plot. It comprises two hotel buildings, a spa, a health and fitness center, a swimming pool, saunas, restaurants and conference facilities. Located in the Caucasus mineral waters region, the Plaza Spa Kislovodsk caters to guests seeking treatment for cardiovascular and nervous system conditions, as well as respiratory diseases.
| Type | Hotel/Spa resort |
|---|---|
| Company share | 100% |
| GBA, (sq.m) | 11,701 |
| Number of rooms | 134 |
| Status | Operating |
The Plaza Spa Hotel Zheleznovodsk is a modern mid-class spa and medical resort in the Caucasus mineral waters region. The hotel is adjacent to the main park of Zheleznovodsk, featuring a thermal water source, and has a direct access to the park. A spa treatment area occupies approximately 1,100 sq.m, which includes 45 treatment rooms, saunas, a jacuzzi, an indoor swimming pool and extensive medical and diagnostic facilities.
| Type | Office |
|---|---|
| Company share | 50% |
| GBA, (sq.m) | 28,241 |
| GLA, (sq.m) | 22,035 |
| Parking, units | 138 |
| Status | Completed |
Four Winds Plaza is one of the most prestigious modern class A office buildings in central Moscow. Designed by NBBJ and co-developed by AFI Development and Snegiri Development, Four Winds Plaza hosts the Russian headquarters of Morgan Stanley, Barclays Capital and Moody's among its high quality tenant mix. Four Winds Plaza is easily accessible from Mayakovskaya and Belorusskaya metro stations, as well as from 1st Tverskskaya Yamskaya streets and the Garden Ring. The Company disposed of its share in the project in January 2013.
| Type | Residential |
|---|---|
| GBA, (sq.m) | 41,364 |
| GSA, (sq.m) | 18,100 |
| GLA, (sq.m) | 5,069 |
| Number of apartments | 108 |
| Parking, units | 323 |
| Status | Completed |
Four Winds Residential is a luxury residential building, with a commercial area on the ground floor, which is part of the Four Winds mixed-use development. The construction was completed at the end of 2008. The project includes a fitness and retail zone, which is leased to third party tenants.
| Type | Residential |
|---|---|
| GBA, (sq.m) | 41,980 |
| GSA, (sq.m) | 15,821 |
| Number of apartments | 114 |
| Status | Completed |
Ozerkovskaya (Aquamarine) II is a high-end residential complex which includes 114 luxury apartments of between 70 and 300 sq.m. The complex has its own amenities including a courtyard with a playground, a recreational area, a flower garden and lawns, and a 240 sq.m pond, which is converted into an ice skating rink in winter.
AFI Development Plc is managed by the Board of Directors, which currently consists of three directors with vast experience in the fields of finance, investment management and real estate.
Of the company's three directors, two are independent.
Mr Leviev has served as Executive Chairman since 22 November 2012 and prior to this, as Chairman from 1 January 2008. In addition to this, he holds a 48.13% stake in Africa Israel Investments Ltd and serves as its Chairman. He is also the owner and President of the LLD Diamonds Ltd Group and is the President of the Federation of Jewish Communities of the CIS.
Mr Demetriou serves as an independent non-executive director of AFI Development PLC. He is a qualified lawyer in both Cyprus and England (Barrister at Law). Mr Demetriou is a former Member of Cyprus Parliament and of the European Parliament, as well as an Honorary Member of the Parliamentary Assembly of the Council of Europe. He currently provides legal services through his law office, Panayiotis Demetriou & Associates LLC.
Mr Tahan has served as an independent non-executive director of AFI Development PLC since 20 January 2017. Mr Tahan is an investment professional, with ten years' experience at Goldman Sachs International in both the Equities and Investment Management divisions. He currently works as the Chief Investment Officer at Manray Partners Limited in London. Mr Tahan holds a Bachelor's degree in Economics from the University of Manchester, UK.
AFI Development's Russian operations are concentrated in its main Russian operating subsidiary, AFI RUS LLC. Led by its CEO, Mr Mark Groysman, the senior management team of AFI RUS LLC consists of highly experienced professionals:
CEO of AFI RUS LLC from May 2011, Mr Groysman is a seasoned real estate professional with over 25 years of experience in real estate development, investments and asset and property management. Prior to joining AFI Development, Mr Groysman was the general manager of Sawatzky Property Management, the company he established in 1992 which later become a leader in the Moscow property management market.
Mrs Pirogova joined the management team in October 2011 with a long and successful track record in Russian real estate, particularly with regards to M&A deals and tax issues. For seven years prior to joining AFI Development, Natalia worked as Financial Director and Managing Partner at Fleming Family and Partners Limited and as Managing Director at Marbleton Advisers Limited.
Mrs Leviev-Eliazarov's core experience revolves around management of large shopping centres. Before joining AFI Development, Tzvia managed shopping centres for Africa-Israel Investments Ltd. in Israel and established long-term business relationships with a variety of international retail chains. Tzvia Leviev-Eliazarov is currently responsible for managing AFIMALL City.
Mr Potashnikov has been with AFI Development since 2005. Prior to joining the Company, he was Deputy Chief Engineer at the Mayor's office in Arara Ba Negev, Israel. Mr Potashnikov and his team are responsible for the Company relationships with Russian local authorities and pre-development approval processes.
Dmitry Kurnikov joined AFI Development in April 2014. He has more than 15 years' experience in real estate development. Prior to joining AFI Development, Dmitry held senior roles in development companies BARKLI, Forum Properties, Central Properties and Insigma, where he led the development of projects including office centres "Hermitage Plaza", "Aurora Business Park", "Dvintsev", "Pavlovskiy", and elite residential complexes "Italian Quarter" and "Roman House".
After two years of contraction, the Russian economy exhibited tepid signs of recovery in 2017, with GDP growing by 1.8% (IMF). Reduced financial outflows combined with higher oil prices allowed economic activity to stabilise and a 0.5% rise in real wages alongside falling inflation proved conducive to consumption.
Inflation fell by more than expected in 2017 to 4.2%, while consumer debt grew for the first time in two years in Q4 2017.
Investment volumes expanded by 27% year-on-year to €4.06 billion in 2017, however foreign capital comprised only 14% of total investment for the year and such figures remain considerably below the €10 billion recorded in 2013.
The gradual recovery of the Russian economy is expected to continue in 2018, with GDP growth forecast to reach approximately 1.7% for the year.
(Sources: Russian Federation: In Search of a New Growth Model, February 2018, IMF; Marketbeat - Commercial Real Estate Russia, January 2018, Cushman & Wakefield)
Demand in the Moscow office market continued to improve in 2017 as uptake rose by 21% to 1.28 million sqm. Supply also recorded a notable recovery as the total volume of new office completions grew by 29% year-on-year to 408,000 sqm.
Demand for Class A and B+ office space remained the driving force behind the Moscow office market. The two classes equated to 90% of all deals agreed in 2017 and contributed to a decline in the overall office vacancy rate from 15.5% to 13.8%.
Rents remained relatively stable throughout 2017, with foreign currency denominated leases amounting to only 7% of total leased space. Class A rental rates reached RUB24,000-40,000 per sqm. per year with Class B+ rents at RUB12,000-25,000 per sqm. per year.
(Source: Moscow Office Market, Q4 2017, JLL; Marketbeat - Commercial Real Estate Russia, January 2018, Cushman & Wakefield)
Despite the completion of three new shopping centres in Moscow this past year, total new retail construction in Moscow more than halved in 2017 year-on-year as developers focused on optimising their existing portfolios.
The vacancy rate in quality Moscow shopping centres reached 9.4% by year-end.
The Russian retail market recorded turnover growth of 1.2% year-on-year in 2017, and the entry of 49 new international brands such as Disney and Under Armour into the Moscow retail market reflects the sustained interest in the sector held by global firms.
(Source: Marketbeat - Commercial Real Estate Russia, January 2018, Cushman & Wakefield)
By the end of Q4 2017 supply on the 'Old Moscow' residential market stood at 2.84 million sq.m, largely in-line with supply in Q3 2017. The 'New Moscow' residential market however registered a decline in supply of 12.3% in Q4 2017 from the previous quarter as only a single new project entered the market in the period.
The weighted average asking price for newly built business-class properties reached RUR 247,500 per sq.m. (US\$4,267) at the end of Q4 2017, a 1.7% increase from the quarter prior.
(Source: Overview of Newly Built Housing in Moscow, December 2017, Miel Real Estate)
AFIMALL City is a major retail centre located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 275,046 sq.m (including parking), and GLA of nearly 107,000 sq.m, the project has a shopping gallery of nearly 460 shops, an 11-screen movie theatre and a number of additional outstanding leisure facilities. AFIMALL City is one of Europe's largest and most ambitious retail developments in recent years. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience unmatched in any other retail development in Moscow.
During 2017 our flagship project, AFIMALL City, demonstrated solid growth in footfall, revenue and NOI.
Average daily footfall in December 2017 was 18% higher than in December 2016, reflecting improving consumer sentiment and the further development of the Moscow City area (such as improving transportation infrastructure and the opening of new office space).
Revenue grew 24% year-on-year (US\$ 81.8 million for 2017) and NOI increased 26% year-onyear (US\$62.1 for 2017). Occupancy at the end of 2017 stood at 89%.
A number of new retailers entered the mall during the year, including: Gulliver and Reima children goods outlets, Otto Berg men's fashion, a large fragrance and beauty shop "Golden Apple" and Tumi travel accessories.
According to independent appraisers JLL, the market value of AFIMALL City as of 31 December 2017 was US\$696.0 million.
Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the very heart of the historical Zamoskvorechie district of Moscow. The project consists of four Class A buildings and common underground parking. The project creates very attractive working conditions through state-of-theart architecture, innovative design and efficient use of space. Due to these characteristics, "Aquamarine III" sets new standards for quality and creates an aspirational environment among Moscow's commercial developments.
The project saw a significant turnaround in 2017. Following a major lease agreement with Deutsche Bank in July, Company agreed to dispose of buildings 2 and 4 to one of the leading Russian banks for RUR7.89 billion (circa US\$135 million) in November 2017. The transaction was successfully completed in February 2018.
The Company currently owns one remaining building in the complex (GBA 18,805 sq.m including underground parking), which is leased to Deutsche Bank, Brown-Forman and other tenants.
Following the restructuring of the loans of Aquamarine III and of AFIMALL City with VTB Bank PJSC, the loan at Aquamarine III was fully repaid in January 2018.
According to independent appraisers JLL, the market value of the remaining building of the Complex as of 31 December 2017 was US\$63.2 million.
The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two in the Caucasus Mineral Waters region.
The Aquamarine Hotel is a modern, 4 star hotel located in the heart of Moscow. It is part of the company's mixed-use Aquamarine development, which also houses an A-class office centre, Aquamarine III, and the completed elite residential complex Aquamarine II.
The Hotel provides high level services and offers 159 spacious rooms, a fitness-centre, spacentre, bar, restaurant, and conference rooms. It is located in the Zamoskvorechie district which is a 20 minute walk from both the Kremlin and the Tretyakov Gallery, and a 5 minute walk from the Novokuznetskaya and Tretyakovskaya metro stations. The Hotel has added to the infrastructure of the historical district and is convenient for both business travellers and tourists.
Despite a slowdown in international business activity in Moscow and growing competition in the market, the hotel demonstrated strong performance in 2017, with average occupancy of 75%.
The balance sheet value of the project as of 31 December 2017 was US\$15.8 million.
Plaza Spa Zheleznovodsk is a sanatorium project that was launched in the summer of 2012 and is located in Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms on 11,701 sq.m of gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.
During 2017 the hotel performed in line with expectations with occupancy levels reaching an average of 70% for the year. The performance of the hotel was negatively influenced by increasing competition in the sector and weaker domestic demand in comparison to recent years.
The balance sheet value of the project as of 31 December 2017 was US\$11.8 million.
The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility began operations in 2008 after a full reconstruction and now has a total of 275 rooms spread over 25,000 sq.m.
Today, the Plaza Spa Kislovodsk is a popular spa hotel which has established new standards of quality and hospitality for the entire region. It offers an extensive range of medical services focused on the treatment of cardiac diseases. Diagnostic and treatment equipment is continually updated, and staff regularly attend training sessions for new methods of treatment to aid patient rehabilitation.
In 2017 the hotel performed well, with average annual occupancy at 73% for the year.
Since February 2017, AFI Development has owned 100% of the project, after acquiring a 50% stake from its partner.
The balance sheet value of the Company share in the project as of 31 December 2017 stood at US\$44.9 million.
In October 2013, AFI Development began construction at "Odinburg", one of the Company's largest residential projects, with a total area of over 33 hectares, located 11 km west of Moscow in the town Odintsovo.
The development is planned to include multi-functional infrastructure comprised of two schools, two kindergartens, a medical centre and other facilities.
The project involves the construction of a multi-storey residential micro district consisting of two phases:
Phase I – Construction of a 22-section residential building named Korona (Crown) and of the infrastructure for the kindergartens and schools. This will have a total sellable area of 153,839 sq.m (2,846 apartments);
Phase II – Construction of 8 residential buildings and of infrastructure for the kindergartens, schools and outdoor multi-level parking. This will have a total sellable area of 307,226 sq.m (6,474 apartments). Each phase includes commercial premises on the ground floor that are planned to be sold to end users.
Phase I ("Korona") construction and supporting infrastructure construction works are currently underway. Building 2 of Phase 1 was delivered in the third quarter of 2017. Construction of Building 6 (phase II) started in the second quarter, while the construction of Building 3 (phase I) – in the third quarter. Currently, the Company actively markets Building 2 (completed apartments), Building 6 and Building 3 (pre-sales).
The balance sheet value of the project as of 31 December 2017 amounted to US\$108.8 million.
AFI Residence Paveletskaya is a modern residential complex in proximity to Moscow city centre on Paveletskaya Embankment. The project is located in Danilovsky Subdistrict (the South Administrative district of Moscow), between the Garden ring and the Third Transportation Ring and is easily accessible by private or public transport. The property is currently under construction.
The project consists of three phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 52,928 sq.m and total General Sellable Area (GSA) of 31,306 sq.m. This phase is planned to include 175 apartments, 220 special units and 6,095 sq.m of flexible commercial space.
Phase II – is planned to have GBA of 51,839 sq.m and total GSA of 27,593 sq.m. This phase is planned to include apartments and 1,403 sq.m of flexible commercial space.
Phase III – is planned to have GBA of 30,495 sq.m and total GSA of 20,452 sq.m. This phase is planned to include apartments and 9,842 sq.m of flexible commercial space.
In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units" 3 began alongside the launch of construction.
3 At AFI Residence Paveletskaya there are two types of residential units: fully residentially zoned units referred to as
During 2017, construction work and the marketing of AFI Residence Paveletskaya progressed as planned. The Company is preparing to start the delivery of apartments to customers in the beginning of Q2 2018.
The balance sheet value of the project as of 31 December 2017 was US\$115 million.
Bolshaya Pochtovaya is a mixed-use project (predominantly residential) located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from developed infrastructure including transport, shops and cultural/leisure amenities as well as a nearby river which significantly enhances the views from the project. It boasts a GBA of 136,581 sq.m on a land area of 5.65 hectares. The construction will be realised in four phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 40,788 sq.m and total General Sellable Area (GSA) of 25,969 sq.m. This phase is planned to include apartments, 8,578 sq.m of flexible commercial space and a kindergarten.
Phase II – is planned to have GBA of 37,373 sq.m and total GSA of 21,483 sq.m. This phase is planned to include apartments and 3,382 sq.m of flexible commercial space.
Phase III – is planned to have GBA of 35,629 sq.m and total GSA of 22,719 sq.m. This phase is planned to include apartments and 2,953 sq.m of flexible commercial space.
Phase IV – is planned to have GBA of 22,792 sq.m and total GSA of 14,744 sq.m. This phase is planned to include apartments and 1,002 sq.m of retail space.
The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya with the marketing of the project proceeding according to schedule.
The balance sheet value of the project as of 31 December 2017 amounted to US\$84.3 million.
Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow, approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira, within walking distance of Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 206,356 sq.m: 111,105 sq.m of residential area, 8,842 sq.m of commercial premises and 794 underground and above ground parking lots.
The project is being constructed in two phases:
Phase I – includes several residential buildings with total General Buildable Area (GBA) of 138,221 sq.m and total General Sellable Area (GSA) of 73,877 sq.m. This phase is planned to include apartments and 8,402 sq.m of flexible commercial space.
Phase II – is planned to have GBA of 68,135 sq.m and total GSA of 46,070 sq.m. This phase is planned to include apartments and 440 sq.m of flexible commercial space.
The construction and marketing the of Botanic Garden continued to advance in-line with expectations in 2017.
The balance sheet value of the project as of 31 December 2017 was US\$ 50.4 million.
"apartments" and commercially zoned units that, according to common market practice in Russia, are sold and referred to as "special units" and can be used for permanent residence.
Tverskaya Plaza Ic is a Class A office development complex located in the cultural and business quarter of the Tverskoy sub-district. The complex is located within a 4-minute walk of Belorusskaya metro station, which serves as the main transport hub linking the city centre with one of Moscow's main airports – Sheremetievo International Airport. The project has a GBA of 50,2200 sq.m (including underground parking of approximately 467 parking spaces) and an estimated GLA of 37,035 sq.m
Following the registration of a 10-year land lease agreement, the Company successfully finalised the development concept, received the necessary construction permit and completed all preconstruction works.
Following some improvement in the Moscow office market, and given the excellent location of the project, AFI Development is preparing the project for construction launch and intends to start building in Q3 2018, provided that the required debt financing is secured.
Based on an independent valuation of the Company's portfolio by Jones Lang LaSalle as of 31 December 2017, the fair value of Tverskaya Plaza Ic is US\$66.3 million.
In Q2 2017, the Company obtained development rights for the project, which has been approved for development by the Moscow constructions authorities as a "recreational centre" with a gross buildable area of 22 thousand sq.m.
Plaza II is a retail-entertainment project envisaging construction of a 7-storey building with one underground level with a total GBA of 22,000 sq.m, providing 14,000 sq.m of Gross Leasable Area.
Based on an independent valuation of the Company portfolio by Jones Lang LaSalle, as of 31 December 2017, the fair value of the Company share in Plaza IV was US\$21.7 million.
Plaza IV is a Class A office development with supporting ground level retail zones, located at 11, Gruzinsky Val. The project has a GBA of 108,000 sq.m (including underground parking) and an estimated GLA of 61,350 sq.m
In March 2017 the Company acquired the remaining 5% in the project from its partner, consolidating ownership of the project.
Based on an independent valuation of the Company portfolio by Jones Lang LaSalle, as of 31 December 2017, the fair value of the Company share in Plaza IV was US\$67 million.
Kossinskaya is mixed-use building totalling 108,528 sq.m with nine aboveground floors and a single underground level. The property was constructed in 2005.
Based on an independent valuation of the Company portfolio by JLL as of 31 December 2017, the fair value of Kossinskaya is US\$28.7 million.
In addition to multiple yielding properties and projects under development, AFI Development also has a land bank which consists of projects that are not currently under development.
By retaining full flexibility regarding future development of these projects, the Company remains well placed to benefit from further recovery in the regional real estate markets. Given its strong
track record in bringing projects to completion, this represents a significant competitive advantage for AFI Development.
AFI Development's strategy with respect to its land bank is to activate projects only upon securing necessary financing and having full confidence in the demand levels of prospective tenants or buyers.
This section presents information regarding the Company's exposure to each of the risks listed below, as well as the Company's objectives, policies and processes for measuring and managing risks.
The Board of Directors is ultimately responsible for the establishment and oversight of the Company's risk management framework as well as for developing and monitoring the Company's risk management policies.
The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company's Audit Committee oversees management monitoring of compliance with the Company's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Board of Directors requests management to take corrective actions as necessary and submit follow up reports to the Audit Committee and the Board, addressing deficiencies found.
Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables from customers and investment securities.
Financial assets that are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivables represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, including outstanding receivables. The Company has policies in place to ensure that, where possible, rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored.
AFI Development has no other significant concentrations of credit risk, although collection of receivables could be influenced by economic factors.
During 2017, the Company limited its exposure to credit risk by investing only in liquid securities and with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group has only invested in securities with high credit ratings, management does not expect any existing counterparty to fail to meet its obligations.
In February 2018 the Board of Directors approved a new cash management and investment policy allowing the Company to invest 20% of its available cash into medium and high risk instruments, including externally managed investment products.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks, the Company aims to avoid recourse to AFI Development on loans taken by subsidiaries.
As at 31 December 2017, there were three outstanding guarantees: one for the amount of US\$1 million in favour of VTB Bank PJSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City), the second for the amount of US\$83.1 million in favour of VTB Bank PJSC, under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III) and the third for the amount of US\$ 51.1million, also in favour of VTB Bank PJSC, under a loan facility agreements of Sanatorium Plaza LLC and Sanatorium Plaza SPA LLC (Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk).
In January 2018, AFI Development provided an additional guarantee in favour of VTB Bank PJSC for the loan amounting to US\$12.2 million, taken by its subsidiary OJSC MKPK to refinance the incurred construction costs. In Q1 2018 guarantees of AFI Development under a loan facility agreement of Bellgate Construction Limited (AFIMALL City) and under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III) were terminated due to repayment of debt under loan facility agreements.
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. AFI Development's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.
Management monitors AFI Development's liquidity position on a daily basis and takes necessary actions, if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised.
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the available returns for shareholders. We are exposed to market risks from changes in both foreign currency exchange rates and interest rates. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks. To date, we have not utilised any derivative or other financial instruments for trading purposes.
We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2017, 34 % of
our financial liabilities were fixed rate. For more detail see note 31 to our consolidated financial statements.
The Company is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of AFI Development's entities, primarily the US Dollar, Russian Rouble and the Euro.
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.
The Company's objective is to manage operational risk so as to balance the need to avoid financial losses and damage to the Group's reputation with overall cost effectiveness.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk.
Critical accounting policies are those policies that require the application of our management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below.
A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in notes 3 and 5 to our consolidated financial statements.
We make estimates and assumptions regarding the fair value of our investment properties that have a significant risk of causing a material adjustment to the amounts of assets and liabilities on our balance sheet. In particular, our investment properties under development (which currently comprise the majority of our projects) are remeasured at fair value upon completion of construction and the gain or loss on remeasurement is recognised in our income statement, as appropriate. In forming an opinion on fair value, we consider information from a variety of sources including, among others, the current prices in an active market, third party valuations and internal management estimates.
The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data, actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition. For further details, please refer to Note 3 to our consolidated financial statements.
We recognise impairment losses with respect to financial assets, including loans receivable and trade and other receivables, in our income statement if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. We test significant financial assets for impairment on an individual basis and assess our remaining financial assets collectively in groups that share similar credit characteristics. Impairment losses with respect to financial assets are calculated as the difference between the asset's carrying amount and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate of that asset.
Estimating the discounted present value of the estimated future cash flows of a financial asset is inherently uncertain and requires us both to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Changes in one or more of these estimates can lead us to either recognising or avoiding impairment charges
We recognise impairment loss with respect to non-financial assets, including investment property under development and trading properties under construction, if the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, we discount estimated future cash flows of the asset to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amounts of impaired non-financial assets are reduced to their estimated recoverable amount either directly or through the use of an allowance account and we include the amount of such loss in our income statement for the period.
We assess at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, we then estimate the recoverable amount of the asset. Estimating the value in use requires us to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The development of the value in use amount requires us to estimate the life of the asset, its expected cash flows over that life and the appropriate discount rate, which is primarily based on our weighted average cost of capital, itself subject to additional estimates and assumptions. Changes in one or all of these assumptions can lead to us either recognizing or avoiding impairment charges.
We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as capitalization of expenses, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess, in the course of our tax planning process, our ability and the ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future taxable profit and available tax planning strategies. If, in our management's judgment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential
inability to fully recover deferred tax assets. In our consolidated financial statements, the analysis is based on the estimates of taxable income in the jurisdictions in which we operate and the period over which the deferred tax assets and liabilities will be recoverable.
If actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could adversely affect our financial position and results of operations.
The fair value of employee share options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historic experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
There were no related party transactions (as defined in the UK Listing Rules) in the financial year ended 31 December 2017 or in the period since 31 December 2017.
In this section of the report the Company provides disclosures required by various UK Listing Rules applicable to it, including those required under the UK Listing Rule 9.8.4 R.
The Board of Directors states as follows:
Since 7 September 2016, the controlling shareholder of the Company is Flotonic Limited ("the controlling shareholder"), which was holding a 64.88% interest in AFI Development Plc as of 31 December 2017. Flotonic Limited is controlled by Mr Lev Leviev, the Company's Executive Chairman of the Board.
The Company has entered into a Relationship Agreement under the UK Listing Rule 9.2.2A R (2)(a) with its controlling shareholder on 27 October 2016.
The Board of Directors is satisfied that the Company has complied with the independence provisions in the Relationship Agreement with its controlling shareholder during 2017.
So far as the Company is aware, the independence provisions included in the Relationship Agreement have been complied with during 2017 by the controlling shareholder and any of their associates.
All independent directors supported the above statement.
At the Annual General Meeting of Shareholders held on 20 December 2017, the Company had a separate meeting of independent shareholders of the Company's B-shares (the premium listed shares) to approve the re-election of its independent directors, as required by the UK Listing Rules 9.2.2E R. All independent directors were approved by the meeting of independent shareholders. The Company is therefore in compliance with the UK Listing Rule 9.2.2E R.
Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus Stock Exchange, and therefore it is not required to comply with the corporate governance regime of Cyprus. Pursuant to the UK Listing Rules however, the Company is required to comply with the UK Corporate Governance Code4 or to explain its reasons for non-compliance. The Company's policy is to achieve best practice in its standards of business integrity in relation to all activities. This includes a commitment to follow the highest standards of corporate governance throughout the AFI Development group. For the financial year 2017, the Company applied the UK Corporate Governance Code published in April 2016 (the "Code").
The directors are pleased to confirm that the Company has complied with the provisions of the Code for the period under review, with the exception that the Executive Chairman of the Board, Mr Leviev, was not independent on appointment (as recommended by section A.3.1 of the Code) by virtue of the fact that he is an Executive Chairman and is, indirectly, a major shareholder of the Company. Mr Leviev holds a controlling stake in Flotonic Limited, the major shareholder of the Company. The directors consider Mr Leviev to be a key member of the Company's leadership
4 A copy of the Code can be downloaded free of charge from the Financial Reporting Council website at http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx
and are of the opinion that his oversight, management role and business reputation are important to the Company's success. The directors are therefore of the view that Mr Leviev should continue as Executive Chairman as it would be beneficial for the Company.
The Board seeks to present a fair, balanced and understandable assessment of the Company's position and prospects, and details are given in the Management Report.
The directors are responsible for the preparation of the Annual Report and financial statements of the Company.
The Full Year 2017 consolidated financial statements were approved by the Board of Directors on 16 April 2018, and published on 17 April 2018. After having reviewed a cash flow projection for the period ending 31 December 2022, having discussed it with management and the Company auditors, the directors reached a reasonable expectation that the Company had adequate resources to continue in operational existence for at least the coming 12 months. For this reason, they adopted the going concern basis in preparing the accounts.
The Board assessed the prospects of the Company over a period of five years in December 2017. The Board approves detailed Company business plans for each calendar year, which normally include five years projections, the period that the Board considers most appropriate. The period of five year enables the Board to see the development of long term real estate projects and a long term financial performance picture of the Company.
Where appropriate, sensitivity and scenario analysis are used to stress-test the resilience of the Company and its business model to the potential impact of the principal risks, or a combination of those risks.
The Board confirms that its assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and/or liquidity, and which are set out in the Principal Risks and Uncertainties section of this report, was robust.
Based on its assessment, the Board confirms that it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of five years, to December 2022.
Throughout 2017, the Company had a strong non-executive representation on the Board. Of the three directors currently on the Board, there are two non-executive directors, both of whom are independent. The two independent non-executive directors are Panayiotis Demetriou and David Tahan. Panayiotis Demetriou has served as Senior Independent Director since 14 July 2016. Neither of the directors that the Board determined as independent has been an employee of the Company, has had a material business relationship with the Company, has received additional remuneration from the Company apart from director's fee, has had close family ties with any of the Company's advisers, directors or senior employees, holds cross-directorships or has
significant links with other directors, represents a significant shareholder or has served on the Board for more than nine years.
The biographies of directors are provided in this report in the 'Board of Directors' section above and can also be reviewed on the website of the Company at: http://www.afidevelopment.com/en/about/board-of-directors
The Board is satisfied that no one individual or group of directors has unfettered powers of discretion, that an appropriate balance exists between the executive and non-executive members of the Board and that between them, the directors bring the range of skills, knowledge and expertise necessary to lead the Company.
The roles of the Executive Chairman and Chief Executive are split and clearly defined. The Executive Chairman, Mr Lev Leviev, provides strategic leadership and leads key negotiations with the Moscow Authorities, other government authorities in regions of AFI Development operations, with key lenders and with its counterparties in transactions of strategic importance. Additionally, the Executive Chairman is generally responsible for the governance of the Board, for facilitating the effective contribution of all directors and for ensuring that Board members are aware of the views of major shareholders. The Chief Executive in the Company's structure is the CEO of AFI RUS LLC, the main operating subsidiary of the Company. The Chief Executive, Mr Mark Groysman, occupies this position since 2011. Mr Groysman is responsible for all aspects of the operation and management of the business in the Russian Federation. His role includes developing an appropriate business strategy for the Board's consideration and approval, and ensuring that the strategy agreed by the Board is implemented in a timely and effective manner.
The Board of Directors normally meets at least five times a year to review trading performance, budgets and funding; to set and monitor strategy; to examine acquisition opportunities; to review and approve financial statements and to report to shareholders. There is a formal schedule of matters specifically reserved to the Board for decisions5 . The Board is responsible for the strategy, approval of annual budgets, approval of interim and final financial results, maintaining the system of internal control, compliance and risk management, approving major transactions and other matters.
To enable the Board to perform its duties, each director has full access to all relevant information. It is the Executive Chairman's responsibility to ensure that the Board is provided with accurate, timely and clear information in relation to the Company and its business.
5 A copy of the schedule can be found on the Company website: www.afi-development.com.
| Name | Board | Audit Committee |
Remuneration Committee |
Nomination Committee |
|---|---|---|---|---|
| Lev Leviev | 6 | - | - | - |
| David Tahan | 11 | 5 | 0 | 1 |
| Panayiotis Demetriou | 11 | 5 | 0 | 1 |
| Dates held | 20.01.2017 | 20.01.2017 | ||
| 20.02.2017 | ||||
| 06.04.2017 | 06.04.2017 | |||
| 19.04.2017 | ||||
| 29.05.2017 | 29.05.2017 | |||
| 21.08.2017 | 21.08.2017 | |||
| 13.11.2017 | ||||
| 20.11.2017 | 20.11.2017 | |||
| 28.11.2017 | ||||
| 18.12.2017 | 18.12.2017 | |||
| 21.12.2017 | ||||
| No. of meetings held during 2017 |
11 | 5 | 0 | 1 |
Attendance at Board Meetings in 2017 was as follows:
Note: Where '-' is shown, the director listed is not a member of the committee.
The matters discussed at the board meetings included:
All directors, the Board and each of the Board Committees are authorised to obtain independent legal or other professional advice as necessary, to secure the attendance of external advisers at their meetings and to seek information from any employees of the Company in order to perform their duties.
At the Board Meeting on 18 December 2017 the non-executive directors met without the Chairman present to appraise the Chairman's performance in 2017.
Non-executive directors are invited to join the Board for a three-year period, subject to reelection by shareholders as provided for in the Company's articles of association.
The Board has adopted a policy and procedures for managing and, where appropriate, approving conflicts or potential conflicts of interest.
Insurance cover is in place to protect board members and officers against liability arising from legal action taken against them in the course of their duties.
The appointment and removal of the Company Secretary is a matter for the Board. All directors have access to the advice and services of the Company Secretary.
In 2017 AFI Development conducted performance evaluations for the Board, its committees and individual directors in-house.
The appraisal of the Chairman's performance was conducted in December 2017 by the nonexecutive directors, under the leadership of Mr Panayiotis Demetriou, the Senior Independent Director.
The Company's Executive Chairman, Mr Lev Leviev, holds a 48.13% stake in Africa Israel Investments Ltd and also serves as its Chairman. In addition he is the owner and the President of the LLD Diamonds Ltd, and the President of the Federation of Jewish Communities of the CIS.
In accordance with the Code, the Company has established an Audit Committee, a Nomination Committee and a Remuneration Committee, each of which has defined terms of reference which are summarised below and are available on the Company's website: www.afi-development.com. Members of these committees are appointed principally from among the independent directors. Each committee and each director has the authority to seek independent professional advice where necessary and to discharge their respective duties at the Company's expense.
As of 31 December 2017 the Committee comprised Panayiotis Demetriou (Chairman) and David Tahan. All members of the Committee throughout the year were independent non-executive directors. The Nomination Committee meets as required for its role. It is responsible for preparing selection criteria and appointment procedures for members of the Board and reviewing on a regular basis the structure, size and composition of the Board. In undertaking this role, the Committee refers to the balance of skills, knowledge, independence and experience required on the Board based on the Company's stage of development and in light of such considerations, makes its appointment recommendations to the Board. When assessing candidates, the Nomination Committee uses objective criteria; all appointments are based on merit. The Nomination Committee also considers future appointments and makes recommendations regarding the composition of the Audit and Remuneration Committees.
When appointing new directors to the Board, objective criteria are applied. Appointments are made on merit with due regard to the benefit of diversity on the Board, both in terms of a broad range of skills, expertise and experience, and with respect to gender. There are currently no women on the Board. However, the Company is committed to the principle of diversity and equal opportunities. As of 31 December 2017, female representation across the workforce of AFI Development was approximately 69%, while at the middle management level the figure was approximately 45%. In addition, 40% of the senior management team of AFI RUS LLC, the Company's main operating subsidiary, are female.
During 2017 the Nomination Committee met on one occasion, when it considered the appointment of Mr David Tahan to the Board of Directors of AFI Development.
The Remuneration committee consists of Panayiotis Demetriou, (Chairman) and David Tahan. All committee members are and have been independent non-executive directors. The Remuneration Committee is responsible for:
The remuneration of non-executive directors is determined by the Board, following a recommendation of the Remuneration Committee, although this can be reviewed by the Remuneration Committee. No director or manager may be involved in any discussions or decisions relating to his or her own remuneration.
The Remuneration Committee discussed the existing executive remuneration practices in place and came to the opinion that the remuneration package of executive directors should be determined on an individual basis, in the context of both the market, in which the Company operates, and good corporate governance practice. In determining executive directors' individual remuneration packages, the Remuneration Committee applies the provisions of Schedule A to the UK Corporate Governance Code. As of 31 December 2017, the Company had one executive director, Mr Lev Leviev.
The Remuneration Committee did not meet in 2017.
The Remuneration Committee did not appoint any external consultants during 2017.
The Audit Committee comprises two independent directors and meets at least five times each year at appropriate times in the reporting and audit cycle of the Company and more frequently if required. The members of the Audit Committee during the year were David Tahan (Chairman from 20 January 2017) and Panayiotis Demetriou. All members of the Committee are and have been independent non-executive directors.
The purpose of the Audit Committee is to assist the Board in fulfilling its responsibilities of oversight and supervision of, among other things:
managing the internal audit process as necessary, including the appointment of an internal auditor, approving annual internal audit plans and reviewing internal audit reports.
The Audit Committee supervises and monitors, and advises the Board on risk management and control systems and the implementation of codes of conduct. In addition, the Audit Committee supervises the submission by the Company of financial information and a number of other audit-related issues (both external and internal) and makes recommendations to the Board accordingly.
In 2017 the Committee led and supervised the tender for external audit services following the expiry of 10 years term of KPMG Limited. Results of the tender were reported to the Committee in November 2017 and, upon discussion, the Committee recommended to re-appoint KPMG Limited for a new term.
The Committee is fully satisfied with its work and that the remuneration of the auditors is adequate and competitive. During the year KPMG Limited provided an insignificant scope of nonaudit services – it was tax advisory work for Cyprus companies in the amount of US\$10,000. The Audit Committee believes that independence of the auditors was safeguarded by the fact that the amount of fee was insignificant.
External auditors are present at every meeting of the Audit Committee. The auditors' reports are reviewed and discussed by the Committee members to ensure the Committee understands all issues and, if required, appropriate action can be taken.
The Audit Committee held five meetings during 2017. The Board is satisfied that at all stages during 2017 at least one member of the Audit Committee had recent and relevant financial experience.
During the year the Committee reviewed financial performance, annual budget and discussed cash management and external investment issues.
During 2017, the Company did not pay any dividends. In the future, the Company may consider making dividend payments in respect to its ordinary shares, when and if commercially prudent, after taking into account profits, cash flow and capital investment requirements. No dividends will be paid outside of profits.
The Company takes its commitment to health and safety very seriously. It reviews its policies, procedures and standards on a regular basis to ensure that its properties and developments offer a safe environment for its employees, customers and suppliers, as well as for other visitors.
The Company works with its suppliers and contractors to ensure that they meet the Company's high health and safety standards.
The directors place considerable importance on maintaining open and clear communication with the Company's investors. The Company's investor relations department is dedicated to facilitating communication with shareholders.
The Company maintains an ongoing dialogue with its shareholders, discussing a wide range of relevant issues including strategy, performance, the market, management and governance within the constraints of the information already known to the market. The principal methods of communication with shareholders are the Company's news announcements, the interim report,
the annual report and financial statements, the annual general meeting, the investors' conference calls and the corporate website. In addition, the Company undertakes regular meetings with investors and participates in sector conferences. Upon request, individual meetings with existing or potential investors can be arranged via the Investor Relations department of the Company. The Senior Independent Director can also be available to shareholders, in case they have concerns.
Since the foundation of AFI Development, its main shareholder of the Company had been Africa-Israel Investments Limited ("AFI Investments"), which had held a 64.88% interest in AFI Development. On 7 September 2016 AFI Investments disposed of all its holding in AFI Development to Flotonic Limited, controlled by Mr Lev Leviev ("the disposal transaction"). Following the disposal transaction, Mr Lev Leviev, the Executive Chairman of the Company, has become the sole major shareholder of AFI Development.
Since the controlling shareholder of the Company is its Executive Chairman, the communication with the controlling shareholder is on an ongoing basis.
The remaining shareholder base of AFI Development consists of a diverse group of small shareholders, each of whom holds a stake of less than 3%. Communication with these shareholders is maintained through public, regulatory and investor relations channels.
During the course of a year, shareholders are kept informed of the progress of the Company through results statements and other announcements that are released through the Regulated Information Service of the London Stock Exchange and other news services. Company announcements are made available simultaneously on the Company's website, affording all shareholders full access to material information. Shareholders can also raise questions directly with the Company at any time through a facility on the Company's website.
Following publication of quarterly results the Company organises conference calls, during which interested investors, analysts, business journalists and the general audience can converse with senior representatives of the Company. The times and contact numbers of these conference calls are announced in advance via the Regulated Information Service of the London Stock Exchange and published on the Company website.
The Company's annual general meeting allows individual shareholders the opportunity to question the Executive Chairman and members of the Board. Notice of the annual general meeting is sent to shareholders at least 21 days before the meeting. At the meeting, after each resolution has been passed, details are given of the number of proxies lodged together with details of the number of votes cast for and against each resolution.
The Board has overall responsibility for maintaining the Company's system of internal control to safeguard shareholders' investments and the Company's assets, as well as for monitoring the effectiveness of this system. The Audit Committee supervises, monitors and advises the Board of Directors on risk management and control systems together with the implementation of codes of conduct.
The Company implements its procedures according to the best practice on internal control provided in the UK Financial Reporting Council "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" ("the FRC Guidance"). The Company's system of internal control supports identification, evaluation and management of the risks affecting the Company and the business environment in which it operates.
The Company's systems of risk management and internal control are designed, inter alia, to provide a reasonable amount of confidence as to the reliability of the Company's financial reporting, to ensure that the financial reports are prepared in accordance with the requirements of the law and to ensure that the information that the Company is required to disclose in its reports and announcements is gathered, processed, summarised and reported on time and in the format set forth in the Disclosure and Transparency Rules and the Listing Rules of the UK Listing Authority.
The system of internal control at AFI Development is structured along four main groups of controls:
investment and divestment of projects. Asset management is focused on the management of yielding commercial properties, including AFIMALL City.
During 2017, the AFI Development Group employed one full time dedicated internal controller, who was responsible for day-to-day management of the internal control system, preparation and maintenance of necessary documentation, liaising with internal auditors and for internal control reporting to senior management.
Authority is delegated from the Board through the senior management to the operating divisions and clear reporting lines and assigned responsibilities exist amongst different management levels within each division. Segregation of duties is applied throughout the Company.
The Company has a clearly set out organisational structure with well-defined reporting lines between the Board and the heads of each operating division.
The Board of Directors has ultimate decision-making power over significant matters relating to the financial management of the Company such as material changes in banking arrangements (including a change of bankers facilities and signatory category limits), approval of project budgets, General Annual Budget and the Annual Working Programme, changes to the Company's capital structure, and acquisitions and disposals of subsidiaries or projects.
The Company has comprehensive project-based budgeting and reporting processes as well as a finance reporting process, and produces monthly operational results and forecasts.
Detailed annual budgets for the coming year are presented to the Board in December.
Senior management of the Company has implemented the appropriate controls for the Company's financial reporting processes.
In the course of the investment appraisal process the following guidelines are followed by the Company's management:
The Company has a well-defined strategy, which is determined by the senior management and approved by the Board.
The policies and procedures relating to the core business processes are formally documented and communicated to the relevant employees.
The Company retains legal counsels in all relevant jurisdictions in order to ensure on-going compliance with all applicable laws and regulations.
Assurances on compliance with the internal control systems are obtained through a number of monitoring processes, including formal annual and quarterly confirmations of compliance provided by Mr Mark Groysman and Mrs Natalia Pirogova, respectively the Chief Executive Officer and the Chief Financial Officer of AFI RUS LLC, based on quarterly reporting by the Head of Internal Control.
Based on results of a test of the effectiveness of the Company's risk management and internal control systems conducted as at 31 December 2017, in addition to the ongoing monitoring as described below, the Board concluded that for the period ending on 31 December 2017 the risk management and internal control systems were effective. The Board continues to monitor the effectiveness of these systems on an ongoing basis as follows:
AFI Development Plc. became a premium listed company on the London Stock Exchange in 2010 and during 2011 the Remuneration Committee and the Board of Directors revised the principles for executive and non-executive directors' remuneration to meet the requirements of the Code. The same principles were applied during 2017.
The Company believes that its remuneration policies should be effective in attracting, retaining and motivating directors to produce superior results for the Company and in continuously creating sustainable value for its shareholders. The Company makes a clear distinction between the remuneration structure for executive and non-executive directors.
Non-executive directors have a non-performance-related remuneration structure, reflecting the time commitment and responsibilities of their role. Non-executive directors are encouraged to participate in Board meetings in person (the attendance fee for "teleconference participation" in Board meetings is 50% of the attendance fee for "in person participation"). In addition, the base fee of the Senior Independent Director is higher than that of the other non-executive directors to reflect additional duties and responsibilities conferred to such a director under the Code.
Executive directors' remuneration is performance related and includes bonuses and a long term incentive component (usually participation in the Company's share option plan). The Remuneration Committee designs remuneration packages for executive directors on an individual basis, taking into account the provisions of Schedule A of the Code.
The AFI Development Share Option Plan (the "Share Option Plan") was adopted by the Board on 12 April 2007. The Remuneration Committee is responsible for granting options and supervising and administering the Share Option Plan. The Plan is discretionary and options will only be granted when the Remuneration Committee so determines. All employees and directors (except independent directors) of the Company, and those of the Company's holding company or any of its subsidiaries, are eligible to participate in the Share Option Plan at the discretion of the Remuneration Committee. Options are currently intended to be granted only to senior managers, directors (except non-executive directors) and key personnel of the Company or any of its subsidiaries.
The exercise price of an option for each A Ordinary Share, B Ordinary Share or Global Depository Receipt, is determined by the Remuneration Committee and should not be lower than the closing market price on the day preceding the day of grant, unless the Remuneration Committee determines at its discretion that a lower price is required, for example, in order to facilitate the recruitment or retention of a key executive. In any 10 year period, not more than 10% of the Company's issued ordinary share capital may be issued or be issuable under the Share Option Plan and any other employee share plan that the Company operates. Options that have been released or lapsed without being exercised are ignored for the purposes of this maximum limit.
Subject to the participant discharging any relevant tax liability, options will normally be exercisable at the following times: (a) as to one-third of the A Ordinary Shares, B Ordinary Shares or GDRs in respect of which options were granted from the second anniversary of the grant, (b) as to a further one-third of the A Ordinary Shares, B Ordinary Shares or GDRs from the third anniversary of grant, and (c) as to the remainder of the A Ordinary Shares, B Ordinary Shares or
GDRs from the fourth anniversary of grant. A different vesting schedule may be determined by the Remuneration Committee at grant. The vesting of options already granted is not subject to any performance conditions. The Remuneration Committee may, however, determine that options granted in the future should be subject to performance conditions.
If a participant dies, her/his options will be exercisable within a period of 12 months following her/his death. If a participant ceases to be an employee or director by reason of injury, disability, redundancy, the sale of the business for which he works to a third party, or retirement, her/his options may generally be exercised within 6 months of cessation. If a participant ceases to be an employee or director for any other reason, her/his options will normally lapse unless and to the extent the Remuneration Committee decides otherwise.
The Remuneration Committee may satisfy (generally with the consent of the participant) an option on exercise by paying to the participant in cash or other assets the gain (i.e. the difference between the market value of the relevant B Ordinary shares or GDRs on the date of exercise and the exercise price), as an alternative to issuing or transferring the B Ordinary Shares or transferring or procuring the transfer of GDRs to the participant.
The Remuneration Committee may amend the rules of the Share Option Plan at any time. The Share Option Plan will terminate upon the tenth anniversary of approval, if not terminated earlier by the Remuneration Committee. Termination of the Share Option Plan will not affect the subsisting rights of the participants.
In 2017, the Company did not grant any share options under the Share Option Plan.
The aggregate emoluments of each of the directors (including benefits in kind) for the financial accounting period ending 31 December 2017 were as follows:
| Name | Salary/Fee, US\$ | Benefits in kind, US\$ |
Annual bonuses, US\$ |
Pension, US\$ |
Total, US\$ |
|---|---|---|---|---|---|
| Lev Leviev | 1,200,000 | 0 | 0 | 0 | 1,200,000 |
| David Tahan | 59,067 | 0 | 0 | 0 | 59,067 |
| Panayiotis Demetriou |
71,014 | 0 | 0 | 0 | 71,014 |
As of 31 December 2017, there was no long term incentive plan available for the directors.
GDRs:
As of 31 December 2017, there were no valid options over GDRs. All previously granted options have expired during 2017.
As of 31 December 2017, there were no valid options over B Ordinary shares. All previously granted options have expired during 2017.
As of 31.12.2017, Company directors did not have any valid share options.
No pensions and contributions are currently payable to the directors by the Company.
Using options provided by art. 151A of the Cyprus Companies Law Cap 113 for the Financial Year 2017, the Company has opted to prepare a Separate Report in relation to the Non-financial statement, which will be publicly available through the Company's website at www.afidevelopment.com by 30th June 2018. In the current report the Company provides a brief overview of its existing relevant policies.
AFI Development PLC was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC.
This report concerns the Company and its subsidiaries (together referred to as the "Group") and the Group's interest in jointly controlled entities. The principal activity of the Group is real estate investment and development in the Russian Federation, with Moscow being its key market.
AFI Development is focused on developing and redeveloping high quality, integrated, large-scale, commercial and residential real estate assets including offices, shopping centres, hotels, mixeduse properties and residential projects. As part of its strategy, the Company sells the residential units it develops and leases the commercial properties, whilst not excluding opportunistic sales of select developments.
During the years of successful operations in Moscow, AFI Development has worked closely with the City authorities who have long recognised the high value-add nature of our projects.
The Company's experienced management team, with strong knowledge and a proven track record of operating in the Russian market, aims to maintain a diversified portfolio whilst using a flexible, phased development approach. This allows the Company to leverage its development platform and complete projects on a cost-efficient basis, whilst also resulting in cash-generation at the earliest possible opportunity.
During 2017, the Company had four residential projects under construction and sales, and a number of commercial projects and hotels in operation in Russia, as described in more details in other sections of this report.
The Company is a Cyprus legal entity, which is listed in the UK and operates in the Russian Federation. Due to this, the Company needs to comply with various legislative norms in these three jurisdictions.
The Company complies with all relevant Russian environmental legislation, with the Russian Federation being the place of business operations. The Company is currently studying additional environmental requirements imposed under the Cyprus law and develops respective policies.
The Company is committed to diversity among its employees and management, while it complies with all relevant Russian and Cyprus labour and social legislation.
The Company complies with all relevant Russian anti-bribery, corruption and human rights legislation, with the Russian Federation being the place of business operations. The Company has a whistle-blowing policy and operates a hotline for employees who encounter cases of potential fraud, corruption or human rights abuse. The Company is currently studying additional requirements imposed under the Cyprus law in 2017 and develops respective policies.
As at 31 December 2017, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under development and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, as well as residential projects, in Moscow and other regions of Russia. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2017, was US\$1.4 billion6 . About 58% of the assets' book value is attributed to yielding properties.
Revenues for 2017 increased by 29.5% year-on-year to US\$179.1 million, mainly as a result of strengthening of the rouble against the US dollar and addition of full revenue from Plaza Spa Kislovodsk operations following consolidation of 100% stake in the project. The average exchange rate of the Russian rouble to US dollar decreased by 13.0% during 2017. Mainly due to these two factors, AFI Development recorded a 23.6% year-on-year increase in gross profit to US\$61.0 million. Cash, cash equivalents and marketable securities increased by 535% to US\$106.0 million as at 31 December 2017.
In 2017, AFI Development incurred a net loss of US\$4.7 million, compared to net loss of US\$47.9 million in 2016.
Our results have been affected, and are expected to be affected in the future, by a variety of factors, including, but not limited to, the following:
Our properties and projects are mainly located in the Russian Federation. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.
The following table sets out certain macroeconomic information for the Russian Federation as of and for the dates indicated:
| Year ended 31 December 2017, % |
Year ended 31 December 2016,% |
|
|---|---|---|
| Real Gross Domestic Product growth | 1.8 | -0.8 |
| Consumer prices growth (inflation) | 4.2 | 7.2 |
Source: The International Monetary Fund
The following factors affected our performance in 2017:
6 According to the IFRS rules, Investment property and Investment property under development are presented on a fair value basis, Trading property, Trading property under construction and Property, plant and equipment are presented on a cost basis.
In February 2017 the Company completed the acquisition of 50% stake in the Plaza Spa Kislovodsk project from its partner, increasing its stake in the project to 100%. The transaction involved a payment of US\$5.6 million in cash for project companies' shares and repayment of debt in the amount of US\$16.9 million. The acquisition was financed by a loan from VTB Bank PJSC.
In March 2017, the Company acquired remaining 5% stake in the Tverskaya Plaza IV project from its partner, for US\$1.5 million, increasing its share in the project to 100%.
In May 2017, Company completed a series of transactions to become 100% owner of the Berezhkovskaya project, an operating office complex in Moscow, following an agreement with its partners in the project. According to the transactions, the partner received a title to office premises totalling 3,468.5 sq.m in the project, while Company received the partner's 26% share in the project company, Bizar LLC. The new total area of the premises at the Berezhkovskaya project is 7,910 sq.m.
In November 2017, the Company agreed to dispose of buildings 2 and 4 at the Aquamarine III (Ozerkovskaya III) Business Centre in Moscow to one of the leading Russian banks for RUR7.89 billion (circa US\$135 million). The transaction was successfully completed in February 2018.
Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), and the requirements of the Companies Law of Cyprus, Cap. 113. IFRS differs in various material respects from US GAAP and UK GAAP.
The key elements of our revenue recognition policies are as follows:
Construction Management fee. Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.
Operating expenses consist mainly of employee wages, social benefits and property operating expenses, including property tax, which are directly attributable to revenues. We recognise as expenses in our statement of comprehensive income the costs of employees who have provided construction consulting and construction management services with respect to our investment and trading properties. We also recognise property operating costs (including outsourced building maintenance), utilities, security and other tenant services related to our properties that generate rental income, as expenses on our statement of comprehensive income.
Our administrative expenses comprise primarily of general and administrative expenses such as, audit and consulting, marketing costs, charity, travelling and entertainment, office equipment, as well as depreciation expenses related to our office use motor vehicles, bad debt provisions and other provisions.
We recognise profit or loss from the sale of interests in our subsidiaries when the risks and rewards of ownership are transferred to the buyer in the transaction.
A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases.
Gross profit is the result of the Group's operations and comprises revenue and other income net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.
An external, independent valuation company (with appropriate recognised professional qualifications and recent experience in the location and categories of properties being valued) values the Company's investment property portfolio every six months. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation in a transaction between a willing buyer and a willing seller after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The difference between revalued fair value of investment property and its book value is recognised as gain or loss in the statement of comprehensive income.
Operating profit before net finance costs is calculated by adding revenue, other income, profit on disposal of investment in subsidiaries and valuation gains on investment property, and subtracting operating expenses, administrative expenses and other expenses.
Our finance income comprises net foreign exchange gain, if any, and interest income. We recognise foreign exchange gains and losses, principally in connection with US Dollar or other foreign currency denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. Our interest income is derived primarily from interest on our bank deposits and interest on loans to our joint ventures.
Our finance expense comprises net foreign exchange loss, if any, and interest expense on outstanding loans less interest capitalised. We recognise foreign exchange gains and losses principally in connection with US Dollar denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Russian Rouble. We capitalise our interest expense with respect to our development projects that are under construction, for which amounts are not reflected as expenses in our statement of comprehensive income. When funds are borrowed specifically for a particular project, we capitalize all actual borrowing costs related to the project less income earned on the temporary investment of such borrowings and when funding for a project is obtained from our general funds, we capitalise only funding costs related to the particular project based on the weighted average of the borrowing costs applicable to our general funds. Capitalisation of borrowing costs commences when the activities to prepare the asset are in process and expenditures and borrowing costs are incurred. Capitalisation of borrowing costs may continue until the assets are ready for their intended use.
Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance expense depending on whether foreign currency movements are in a net gain or net loss position.
Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 12.5% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%.
We capitalise all costs directly related to the purchase and construction of properties developed as both investment properties and trading properties, including costs to acquire land rights and premises, design costs, permit costs, costs of general contractors, costs relating to the lease of the underlying land and the majority of employee costs related to such projects.
In addition, we capitalise financing costs related to development projects only during the period of construction. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction has begun. Since the Company's adoption of IAS 40 from 1 January 2009, upon completion of construction works, property classified as investment property under development (which are those properties that are being constructed or developed for future use to earn rental income or for capital appreciation) is appraised to market value and reclassified as an investment property and any gain or loss on appraisal is recognised in our
statement of comprehensive income. Trading properties, which include those projects where we intend to sell the entire project as a whole or in part (this principally includes our residential development projects), are represented on our balance sheet at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale.
Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and three Cyprus companies is the Russian Rouble. The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange prevailing at the balance sheet date and income and expense items are translated into US Dollars at the average exchange rate for the period. If the volatility of the exchange rates is high for a given year or period, the Company uses the average rate for shorter periods i.e. quarters or months for income and expense items. All resulting foreign currency exchange rate differences are recognised directly in our shareholders' equity under the line item "translation reserve."
When a foreign operation is disposed of in its entirety or partially such that control or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. The monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies other than Russian Roubles are initially recorded by our subsidiaries at the exchange rate between the Russian Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Russian Roubles at the exchange rate prevailing at each subsequent balance sheet date. We recognise the resulting exchange rate differences between the dates at which such assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign exchange losses and gains in our statement of comprehensive income. In particular, during the period under review, we have recognised foreign exchange rate gains and losses in connection with US Dollar denominated payables and receivables of our Russian subsidiaries.
We pay VAT to the Russian authorities with respect to construction costs and expenses incurred in connection with our projects, which, according to Russian tax law, can be recovered upon completion of construction. Under Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Under Russian tax law, capitalisation of certain costs in relation to the design, construction and financing of projects that are capitalised for the purposes of consolidated financial statements under IFRS is not allowed. As a result, our tax bases in the related assets may be lower than our accounting bases for IFRS purposes, which would result in deferred tax liabilities. However, the recognition of such costs as expenses may result in accumulated tax losses for Russian tax purposes that we may be able to carry forward against estimated future profits, resulting in deferred tax assets. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used.
Our future results of operations may be affected by our measurement of the fair value of our investment properties and changes in the fair value of such properties. Upon completion of construction, the projects that we have classified as investment property under development are reassessed at fair value and reclassified as investment property, and any gain or loss as a result of reassessment is recognised in our statement of comprehensive income.
Any change in fair value of the investment property under development is thereafter recognised as a gain or loss in the statement of comprehensive income. Accordingly, fair value measurements of investment properties under development may significantly affect results of operations even if the Company does not dispose of such assets.
We have an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values and reports directly to the CFO. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.
| For the year | For the year | Change 2017/2016 | |||
|---|---|---|---|---|---|
| US\$ million | ended 31 December 2017 |
ended 31 December 2016 |
US\$ million | %% | |
| Revenue | |||||
| Construction consulting/management services |
0.2 | 0.2 | (0.0) | -22.9% | |
| Rental income | 117.0 | 83.6 | 33.4 | 40.0% | |
| Sale of residential | 61.8 | 54.5 | 7.4 | 13.5% | |
| 179.1 | 138.3 | 40.8 | 29.5% | ||
| Other income | 3.8 | 3.5 | 0.3 | 7.7% | |
| Expenses | |||||
| Operating expenses | (57.1) | (38.8) | (18.2) | 46.9% | |
| Administrative expenses | (6.0) | (6.6) | 0.6 | -8.9% | |
| (including Bad debt provisions and | |||||
| write-offs) | (0.1) | 1.3 | (1.5) | -111.3% | |
| Cost of sales of residential | (58.4) | (49.5) | (8.9) | 18.0% | |
| Other expenses | (2.4) | (1.3) | (1.1) | 79.3% | |
| (120.0) | (92.7) | (27.3) | 29.5% | ||
| Share of the after tax (loss)/profit of joint ventures |
2.0 | 3.7 | (1.8) | -47.7% | |
| Gross profit | 61.0 | 49.4 | 11.6 | 23.6% | |
| Profit on disposal of investments in subsidiaries |
(3.9) | 1.8 | (5.7) | -318.4% | |
| Profit on purchase of 50% of JV | 7.5 | - | 7.5 | 100.0% |
Summary of statement of comprehensive income for 2017 and 2016
| Valuation gain/(loss) on properties Impairment loss on inventory of real estate |
2.0 - |
(123.0) - |
125.1 - |
-101.6% 0.0% |
|---|---|---|---|---|
| Results from operating activities | 66.6 | (71.9) | 138.5 | -192.6% |
| Finance income Finance expense FX Gain/( Loss) Net finance income/(costs) |
0.8 (50.4) 12.4 (37.3) |
2.1 (44.6) 63.7 21.2 |
(1.4) (5.8) (51.3) (58.5) |
-65.1% 13.0% -80.6% -275.9% |
| Profit before income tax | 29.3 | (50.7) | 80.0 | -157.8% |
| Income tax expense | (34.0) | 2.8 | 36.7) | -1333.8% |
| Loss from continuing operations | (4.7) | (47.9) | (43.3) | 1028% |
To date, we have derived revenues from three sources: rental income, sale of residential properties and construction consulting and management fees.
We derive rental income from our investment properties and hotels that we acquired or developed in the past. In 2017 financial year, we have purchased 50% stake in the Plaza Spa Kislovodsk project from our partner, increasing our stake in the project to 100% and therefore started to show revenue and expenses by line. Previously, only net effect of financial operation had been shown in one separate line (Share of the after tax profit/ (loss) of Joint Ventures).
| For the year ended 31 |
For the year | Change 2017/2016 | |||
|---|---|---|---|---|---|
| US\$ million | December 2017 |
ended 31 December 2016 |
US\$ million |
%% | |
| Investment property | |||||
| AFIMALL City | 81.8 | 66.2 | 15.6 | 23.5% | |
| Premises at Tverskaya Zastava Square | 2.0 | 1.7 | 0.2 | 14.6% | |
| Berezhkovskya office building | 1.9 | 1.8 | 0.1 | 4.9% | |
| Ozerkovskaya (Aquamarine) III | 1.0 | 0.5 | 0.5 | 116.1% | |
| H2O office building | 0.9 | 0.9 | 0.1 | 6.1% | |
| Premises at Tverskaya Plaza IV | 0.1 | 0.0 | 0.0 | 47.8% | |
| Other land bank assets | 0.0 | 0.1 | (0.1) | -54.4% | |
| Premises at Bolshaya Pochtovaya | 0.0 1.0 |
(1.0) | -99.9% | ||
| Hotels | |||||
| Plaza Spa Hotel (Kislovodsk) | 17.1 | - | 17.1 | 100.0% | |
| Plaza Spa Hotel (Zheleznovodsk) | 6.5 | 6.3 | 0.2 | 3.5% | |
| Aquamarine hotel | 5.6 | 5.0 | 0.6 | 13.0% | |
| Total | 117.0 | 83.6 | 33.4 | 40% |
Sale of residential
| For the year ended | For the year | Change 2017/2016 | |||
|---|---|---|---|---|---|
| US\$ million | 31 December 2017 | ended 31 December 2016 |
US\$ million |
%% | |
| Revenue | |||||
| Odinburg | 61.4 | 54.0 | 7.4 | 13.6% | |
| Ozerkovskaya II | 0.5 | 0.5 | (0.0) | -1.3% | |
| Total | 61.8 | 54.5 | 7.4 | 13.5% |
Sale of residential. Our income from sale of residential increased by US\$7.4 million, from US\$54.5 million in 2016 to US\$61.8 million in 2017, due to sale of residential units in the Odinburg project.
Operating expenses. Our operating expenses increased by 46.9% year-on-year to US\$57.1 million in 2017 (2016: US\$38.8 million). Almost half of operating expense rise is explained by share buyback in the Plaza Spa Kislovodsk project. Other factor causing increase in operating costs relates to start of sales for the projects AFI Residence Paveletskaya, Bolshaya Pochtovaya and Botanic Garden. We hired sales managers and expanded our marketing efforts.
Administrative expenses. Our administrative expenses decreased by 8.9% year-on-year to US\$6.0 million in 2017 (2016: US\$6.6 million). The decrease is attributable to the fact that in 2016 the Company incurred consulting and sponsor's fees related to discharge of loans issued to the Company by VTB Bank PJSC , as well as other cost saving initiatives across the Company. Additionally, improved bad debt collection in 2017 led to zero bad debt provision in 2017.
Net valuation gain/ (losses) on properties. Net result of investment property valuation changed from a loss of US\$123.0 million in 2016 to a gain of US\$2.0 million in 2017. For additional information, please refer to "Portfolio Valuation" section below.
Finance income. Our finance income decreased by 65.1% year-on-year to US\$0.8 million in 2017 (2016: US\$2.1 million). The decrease was a result of consolidation of 100% stake in the Plaza Spa Kislovodsk project in Q1 2017, following which the interest paid by the Joint Venture of this project became eliminated as inter-company interest.
Finance expense. Our finance expense increased by 13.0% year-on-year to US\$50.4 million in 2017 (2016: US\$44.6 million), as a result of hedging US\$ loans obligation from VTB Bank PJSC against exchange risk and overall rouble strengthening versus the dollar. Additionally, the finance expenses increased due to new loans taken for the Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk projects.
FX Gain/ (Loss). We recorded a foreign exchange gain of US\$12.4 million in 2017, against a gain of US\$63.7 million in 2016. This was a result of Russian Rouble appreciation versus the US Dollar during 2017.
Income tax expense. Our current tax expense increased by US\$ 13.4 million to US\$ 12.9 million, while deferred tax expense increased by US\$ 23.3 million to US\$ 21.1 million. This was mainly due changes in the Russian tax law effective 1 January 2017, according to which an entity can set-off the accumulated losses only against 50% of profit (previously against 100%). Additionally, sale of non-residential premises to an end-user at Ozerkovskaya III Business Centre in Q4 2017 incurred a Russian capital gain tax (qualified as corporate income tax in Russia) in the amount of US\$3.8 million (offset by the previously accumulated deferred tax). Moreover, an analysis of tax
expenses was performed, part of the past expenses were written-off and, as a result, the Group accrued additional deferred tax liabilities.
Profit/Loss for the year. Due to the factors described above, we recorded a US\$ 4.7 million net loss for 2017 compared to net loss of US\$47.9 million for 2016.
| US\$ thousand | For the year ended 31 December 2017 |
For the year ended 31 December 2016 |
|---|---|---|
| Net cash from operating activities | 104,735 | 35,185 |
| Net cash from/(used in) investing activities | 105,864 | 9,126 |
| Net cash from/(used in) financing activities | (125,271) | (58,035) |
| Effect of exchange rate fluctuations | (479) | (2,202.0) |
| Net increase/(decrease) in cash and cash equivalents | 84,849 | (15,926) |
| Cash and cash equivalents at 1 January | 10,619 | 26,545 |
| Cash and cash equivalents at 31 December* | 95,468 | 10,619 |
* Note: the cash and cash equivalents do not include US\$10.5 million (2016: US\$6.1 million) fair value of marketable securities.
Net cash from operating activities increased to US\$104.7 million in 2017, from US\$35.2 million in 2016. The increase is attributable to the sales start of the projects, and we are receiving advances from customers.
Net cash outflow from investing activities amounted to US\$ 105.9 million as a result of a sale of two buildings at Aquamarine III Business Centre.
Net cash used in financing activities increased to a negative US\$125.3 million in 2017 from a negative US\$58.0 million in 2016 due to Company repaying part of principal amount and interest during 2017.
We require capital to finance capital expenditures, consisting of cash outlays for capital investments in active real estate development projects; repayment of debt; changes in working capital; and general corporate activities.
Real estate development is a capital-intensive business, and we expect to have significant ongoing liquidity and capital requirements in order to finance our active development projects.
For the foreseeable future, we expect that we will continue to rely on our financing activities to support our investing and operating activities. We also expect that our capital expenditures in
connection with the development of real estate properties will comprise the majority of our cash outflows for the foreseeable future.
AFI Development ended 2017 with of approximately US\$106.0 million in cash, cash equivalents and marketable securities on our balance sheet and a debt7 to equity level of 75%.
The Company's financing strategy aims to maximise the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning, the aim is to refinance properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.
| Project / Subsidiary | Lending bank |
Max dept limit (US\$ mn) |
Balance as of Dec-31, 2017 (US\$ mn) |
Available (US\$ mn) |
Nominal Interest rate |
Currency | Maturity |
|---|---|---|---|---|---|---|---|
| AFIMALL City / Bellgate | VTB Bank | 21 billion | 167.5 | 0 | 9.5% | RUR | 27/12/2022 |
| Constractions Ltd | JSC | rub | 276.9 | 3mLibor+5.02% | USD | 27/12/2022 | |
| Ozerkovskaya III / Crown Investments LLC |
VTB Bank JSC |
220 | 83.4 | 0 | 3mLibor+7% | USD | 26/01/2018 |
| Plaza Spa Hotel | VTB Bank | 22.5 | 21.4 | 3mLibor+4.5% | USD | 22/02/2022 | |
| (Kislovodsk) / Sanatorium Plaza LLC |
JSC | 11.6 | 11.5 | 0 | 5.50% | USD | 20/09/2022 |
| Plaza Spa Hotel (Zheleznovodsk) / Sanatorium Plaza SPA LLC |
VTB Bank JSC |
18.4 | 18.2 | 0 | 5.5% | USD | 20/09/2022 |
As of December 31, 2017 our debt portfolio was as follows:
The total balance of secured debt financing reached US\$578.92 million as at 31 of December 2017, including US\$578.6 million of Principal Debt and US\$0.32 million of accrued interest with average interest rate 6.9% per annum as at 31.12.2017 (7.05% per annum as at 31.12.2016) (for more details see note 26 to our consolidated financial statements).
As at 31 December 2017, our loans and borrowings were payable as follows:
| US\$ thousand | As at 31 December 2017 | As at 31 December 2016 |
|---|---|---|
| Less than one year | 86,774 | 749 |
| Between one and five years | 492,484 | 627,074 |
| Total | 579,258 | 627,822 |
From the current reporting period onwards, Jones Lang LaSalle LLC ("JLL") have been appointed as the Company independent appraisers. As at 31 December 2017, based on the JLL independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US\$818.1 million, while the value of the portfolio of investment property under development stood at US\$163.2 million.
7 Debt includes all loans and borrowings. For further details please see note 26 to the Financial Statements.
Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2017, remained unchanged year-on-year at US\$1.4 billion.
| Property | Valuation 31/12/2017, US Dollars |
Valuation 31/12/2016, US Dollars |
Change in valuation, % |
Balance sheet value 31/12/2017, US Dollars |
Balance sheet value 31/12/2016, US Dollars |
|
|---|---|---|---|---|---|---|
| Investment property | ||||||
| 1 | AFIMALL City | 696,000,000 | 666,500,000 | 4% | 696,000,000 | 666,500,000 |
| 2 | Ozerkovskaya III | 63,200,000 | 198,500,000 | -68% | 63,200,000 | 198,500,000 |
| 3 | Tverskaya Plaza II |
21,700,000 | 9,200,000 | 136% | 21,700,000 | 9,200,000 |
| 4 | Berezhkovskaya | 11,900,000 | 12,136,000 | -2% | 11,900,000 | 16,400,000 |
| 5 | Paveletskaya I | 11,712,379 | 11,900,808 | -1% | 11,810,000 | 12,000,000 |
| 6 | H2O | 9,808,249 | 9,223,126 | 7% | 9,890,000 | 9,300,000 |
| 7 | Tverskaya Plaza Ib |
3,560,000 | 3,450,000 | 3% | 3,560,000 | 3,450,000 |
| Total | 817,880,628 | 910,909,934 | -10% | 818,060,000 | 915,350,000 | |
| Investment property under development | ||||||
| 8 | Tverskaya Plaza IV |
67,000,000 | 61,275,000 | 9% | 67,000,000 | 64,500,000 |
| 9 | Tverskaya Plaza Ic |
66,300,000 | 66,000,000 | 0% | 66,300,000 | 66,000,000 |
| 10 | Kossinskaya | 28,700,000 | 28,300,000 | 1% | 28,700,000 | 28,300,000 |
| 11 | Starokaluzhskoye shosse |
1,240,000 | - | 100% | 1,240,000 | - |
| 12 | Bolshaya Pochtovaya |
- | 73,885,110 | -100% | - | 74,100,000 |
| Total | 163,240,000 | 229,460,110 | -29% | 163,240,000 | 232,900,000 | |
| Trading property & Trading property under development | ||||||
| 13 | AFI Residence Paveletskaya |
n/a | n/a | - | 114,983,691 | 76,666,586 |
| 14 | Odinburg | n/a | n/a | - | 108,815,920 | 150,181,009 |
| 15 | Bolshaya Pochtovaya |
n/a | n/a | - | 84,336,992 | - |
| 16 | Botanic Garden | n/a | n/a | - | 50,364,056 | 21,542,643 |
| 17 | Ozerkovskaya II | n/a | n/a | - | 2,027,075 | 1,791,074 |
| Total | - | - | - | 360,527,734 | 250,181,312 | |
| Hotels | ||||||
| 18 | Plaza Spa Hotel Kislovodsk |
n/a | n/a | - | 44,942,392 | 13,823,785 |
| 19 | Aquamarine Hotel | n/a | n/a | - | 15,750,733 | 15,289,552 |
| 20 | Plaza Spa Hotel Zheleznovodsk |
n/a | n/a | - | 11,774,505 | 11,095,402 |
| 21 | Park Plaza hotel Kislovodsk |
n/a | n/a | - | 4,240,732 | 3,947,127 |
| Total | - | - | - | 76,108,362 | 44,155,866 | |
| Grand Total | 981,120,628 | 1,140,370,044 | -14% | 1,418,536,096 | 1,442,587,178 |
| Board of Directors | Lev Leviev - Chairman | |||||||
|---|---|---|---|---|---|---|---|---|
| Panayiotis Demetriou | ||||||||
| David Tahan | ||||||||
| Secretary | Fuamari Secretarial Limited | |||||||
| Independent Auditors | KPMG Limited | |||||||
| Bankers | Public Joint Stock Company VTB Bank | |||||||
| Public Joint Stock Commercial Savings Bank of the Russian Federation (Sberbank) |
||||||||
| Otkritie FC Bank | ||||||||
| Registered Office | Spyrou Araouzou 165, | |||||||
| Lordos Waterfront Building, | ||||||||
| 3035 Limassol, | ||||||||
| Cyprus |
The Board of Directors of AFI Development Plc (the "Company") presents to the members its annual report together with the audited consolidated financial statements of the Company for the year ended 31 December 2017.
The principal activities of the Group, which remained unchanged from last year, are real estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries.
AFI Development is one of the leading real estate development companies operating in Russia. Established in 2001, AFI Development is a publicly traded subsidiary of Flotonic Limited.
AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction quality and customer service.
AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects in Moscow and Russian regions. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favourable return.
As at 31 December 2017, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under construction, and 4 hotel projects .
The Group's results are set out in the consolidated income statement on page 69. The profit of the Group for the year before taxation amounted to US\$29,327 thousand (2016: loss US\$50,697 thousand). The loss after taxation attributable to the Group's owners amounted to US\$4,918 thousand (2016: US\$47,872 thousand).
The Board of Directors does not recommend the payment of a dividend and the loss for the year is transferred to retained earnings or accumulated losses.
The Group is exposed to market price risk, interest rate risk, credit risk, liquidity risk. The most significant risks faced by the Group and the steps taken to manage these risks and the Group's financial risk management objectives and policies are described in note 31 of the consolidated financial statements.
The Group is one of the leading real estate development companies operating in Russia. It focuses on developing and redeveloping high quality commercial and residential real estate
assets in Moscow and the Moscow Region. The strategy during the reporting period and for the future periods is to sell the residential properties that the Group develops and to either lease the commercial properties that the Group develops or sell them if the Group is able to achieve a favourable return.
As described in note 2i, the consolidated financial statements have been prepared on a going concern basis, which assumes that the Group is in a position to secure further financing for its projects under construction and to generate enough cash to cover its working capital requirements and debt service obligations in order to continue its operations in the foreseeable future.
There were no changes to the share capital of the Company during the current year. As at the year end the share capital of the Company comprised of:
All "A" shares are on deposit with BNY (Nominees) Limited and each "A" share is represented by one GDR listed on the London Stock Exchange ("LSE").
All "B" shares were admitted to a premium listing of the Official list of the UK Listing Authority and to trading on the main market of LSE.
Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus Stock Exchange, and therefore it is not required to comply with the corporate governance regime of Cyprus. Pursuant to the UK Listing Rules however, the Company is required to comply with the UK Corporate Governance Code or to explain its reasons for non-compliance. The Company's policy is to achieve best practice in its standards of business integrity in relation to all activities. This includes a commitment to follow the highest standards of corporate governance throughout the AFI Development group. The UK Corporate Governance Code published in April 2016 (the "Code") applies to the Company for the financial year 2017 and onwards.
The Directors are pleased to confirm that the Company has complied with the provisions of the Code for the period under review, with the exception that the Executive Chairman of the Board, Mr Leviev, was not independent on appointment (as required by section A.3.1 of the Code) by virtue of the fact that he is an Executive Chairman and is, indirectly, a major shareholder of the Company. Mr Leviev holds a controlling stake in Flotonic Limited, the major shareholder of the Company. The Directors consider Mr Leviev to be a key member of the Company's leadership and are of the opinion that his oversight, management role and business reputation are important to the Company's success. The Directors are therefore of the view that Mr Leviev should continue as Executive Chairman as it would be beneficial for the Company.
None of the Directors holds shares of the Company directly. Mr Lev Leviev, the Executive Chairman of the Board, holds 64.88% indirectly though Flotonic limited as described in detail in note 32 "Group Composition".
The Group operates five branches and/or representative offices of Cypriot, BVI and Luxembourg entities in the Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City project, Amerone Ltd branch, Bugis Finance branch and Triumvirate I S.a r.I branch operating investment properties and Bastet Estates Ltd branch acting as sale agents for residential properties.
The members of the Board of Directors as at 31 December 2017 and at the date of this report are shown on page 64. The Directors' date of appointment or resignation, if applicable, is indicated on page 64. The term of those that have not resigned will expire on the date of the next annual general meeting of the shareholders but all of them are eligible for re-election. There were no significant changes in the assignment of responsibilities and remuneration of the Board of Directors during the current year.
Any significant events that relate to the operating environment of the Company are described in note 31 to the consolidated financial statements.
Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 38 of the consolidated financial statements.
Disclosed in note 37 of the consolidated financial statements.
The independent auditors, KPMG Limited, have expressed their willingness to continue offering their services. A resolution reappointing the auditors and giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting.
By order of the Board
Fuamari Secretarial Limited Secretary
Nicosia, 16 April 2018
We, the members of the Board of Directors and the Company officials responsible for the drafting of the consolidated financial statements of AFI Development Plc (the 'Company') for the year ended 31 December 2017, the names of which are listed below, confirm that, to the best of our knowledge:
a) The consolidated financial statements on pages 69 to 126:
(i) have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and the requirements of the Cyprus Companies Law ,
(ii) give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidated financial statements taken as a whole,
The Directors of the Company as at the date of this announcement are as set out below:
| Lev Leviev – Chairman | … |
|---|---|
| Non-executive independent directors | |
| Panayiotis Demetriou | |
| David Tahan | |
| Company officers | |
| Chief executive officer | |
| Mark Groysman | |
| Chief financial officer | |
| Natalia Pirogova |
16 April 2018
For the year ended 31 December 2017:
| 2017 | 2016 | ||
|---|---|---|---|
| Note | US\$ '000 | US\$ '000 | |
| Revenue | 7 | 179,051 | 138,296 |
| Other income | 8 | 3,819 | 3,545 |
| Operating expenses | 9 | (57,054) | (38,836) |
| Carrying value of trading properties sold | 20 | (58,404) | (49,475) |
| Administrative expenses | 10 | (6,005) | (6,589) |
| Other expenses | 11 | (2,386) | (1,330) |
| Total expenses | (123,849) | (96,230) | |
| Share of the after tax loss of joint ventures | 17 | 1,957 | 3,742 |
| Gross Profit | 60,978 | 49,353 | |
| Gain on 100% acquisition of previously held interest in a joint venture |
33 | 7,532 | - |
| (Loss)/profit on disposal of investment property | 15 | (3,934) | 1,801 |
| Increase/(decrease) in fair value of properties | 15,16 | 11,570 | (123,045) |
| Impairment loss on properties | (9,548) | - | |
| Net valuation gain/(loss) on properties | 2,022 | (123,045) | |
| Results from operating activities | 66,598 | (71,891) | |
| Finance income | 13,119 | 65,802 | |
| Finance costs | (50,390) | (44,608) | |
| Net finance costs | 12 | (37,271) | 21,194 |
| Profit/(loss) before tax | 29,327 | (50,697) | |
| Tax (expense)/benefit | 13 | (33,991) | 2,755 |
| Loss for the year | (4,664) | (47,942) | |
| Loss attributable to: | |||
| Owners of the Company | (4,918) | (47,872) | |
| Non-controlling interests | 254 | (70) | |
| (4,664) | (47,942) | ||
| Earnings per share | |||
| Basic and diluted earnings per share (cent) | 14 | (0.47) | (4.57) |
For the year ended 31 December 2017:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Loss for the year | (4,664) | (47,942) |
| Other comprehensive income/(expense) | ||
| Items that are or may be reclassified subsequently to profit or loss | ||
| Realised translation difference on 100% acquisition of previously held | ||
| interest in a joint venture transferred to income statement | ||
| (4,271) | - | |
| Foreign currency translation differences for foreign operations | 14,295 | 27,782 |
| Other comprehensive income for the year | 10,024 | 27,782 |
| Total comprehensive income/(expense) for the year | 5,360 | (20,160) |
| Total comprehensive income/(expense) attributable to: | ||
| Owners of the Company | 5,126 | (20,252) |
| Non-controlling interests | 234 | 92 |
| 5,360 | (20,160) | |
For the year ended 31 December 2017:
| interests Share Share Capital Translation Accumulated capital premium reserve reserve losses Total US\$ '000 US\$ '000 US\$ '000 US\$ '000 US\$ '000 US\$ '000 US\$ '000 Balance at 1 January 2016 1,048 1,763,409 (9,201) (338,951) (620,786) 795,519 (3,919) Total comprehensive |
equity US\$ '000 |
|---|---|
| 791,600 | |
| income/(expense) for the period | |
| Loss for the period - - - - (47,872) (47,872) Other comprehensive income - - - 27,620 - 27,620 Total comprehensive |
(70) (47,942) 162 27,782 |
| income/(expense) for the period - - - 27,620 (47,872) (20,252) |
92 (20,160) |
| Transactions with owners of the Company Contributions and distributions |
|
| Share option expense - - - - 857 857 |
- 857 |
| Balance at 31 December 2016 1,048 1,763,409 (9,201) (311,331) (667,801) 776,124 (3,827) |
772,297 |
| Balance at 1 January 2017 1,048 1,763,409 (9,201) (311,331) (667,801) 776,124 (3,827) |
772,297 |
| Total comprehensive income/(expense) for the period Loss for the period - - - - (4,918) (4,918) |
254 (4,664) |
| Other comprehensive income - - - 10,044 - 10,044 |
(20) 10,024 |
| Total comprehensive income for (4,918) the period 10,044 5,126 |
234 5,360 |
| Transactions with owners of the Company Contributions and distributions Acquisition of non-controlling |
|
| interests (note 34) - - (10,132) - - (10,132) 3,422 |
(6,710) |
| Balance at 31 December 2017 1,048 1,763,409 (19,333) (301,287) (672,719) 771,118 (171) |
770,947 |
| CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017 | |||
|---|---|---|---|
| -- | --------------------------------------------------------------------- | -- | -- |
| 2017 | 2016 | ||
|---|---|---|---|
| Note | US\$ '000 | US\$ '000 | |
| Assets | |||
| Investment property | 15 | 818,060 | 915,350 |
| Investment property under development | 16 | 163,240 | 232,900 |
| Property, plant and equipment | 17 | 77,633 | 31,215 |
| Long-term loans receivable | 18 | 1,669 | 15,763 |
| Intangible assets | 204 | - | |
| VAT recoverable | 19 | 48 | 9 |
| Non-current assets | 1,060,854 | 1,195,237 | |
| Trading properties | 20 | 10,792 | 6,854 |
| Trading properties under construction | 21 | 349,735 | 243,327 |
| Other investments | 22 | 10,515 | 6,088 |
| Inventories | 1,318 | 665 | |
| Short-term loans receivable | 18 | 1,090 | 7 |
| Trade and other receivables | 23 | 70,402 | 42,427 |
| Current tax assets | 4,114 | 2,542 | |
| Cash and cash equivalents | 24 | 95,468 | 10,619 |
| Current assets | 543,434 | 312,529 | |
| Total assets | 1,604,288 | 1,507,766 | |
| Equity | |||
| Share capital | 25 | 1,048 | 1,048 |
| Share premium | 25 | 1,763,409 | 1,763,409 |
| Translation reserve | 25 | (301,287) | (311,331) |
| Capital reserve | 25 | (19,333) | (9,201) |
| Accumulated losses | (672,719) | (667,801) | |
| Equity attributable to owners of the Company | 771,118 | 776,124 | |
| Non-controlling interests | 34 | (171) | (3,827) |
| Total equity | 770,947 | 772,297 | |
| Liabilities | |||
| Long-term loans and borrowings | 26 | 492,484 | 627,074 |
| Deferred tax liabilities | 27 | 42,652 | 14,934 |
| Deferred income | 30 | 12,641 | 10,455 |
| Non-current liabilities | 547,777 | 652,463 | |
| Short-term loans and borrowings | 26 | 86,775 | 748 |
| Trade and other payables | 28 | 65,106 | 30,957 |
| Advances from customers | 29 | 123,766 | 51,301 |
| Current tax liabilities | 9,917 | - | |
| Current liabilities | 285,564 | 83,006 | |
| Total liabilities | 833,341 | 735,469 | |
| Total equity and liabilities | 1,604,288 | 1,507,766 |
The consolidated financial statements were approved by the Board of Directors on 16 April 2018.
| Lev Leviev | David Tahan |
|---|---|
| Chairman | Director |
For the year ended 31 December 2017:
| Note | 2017 US\$'000 |
2016 US\$'000 |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Loss for the year | (4,664) | (47,942) | |
| Adjustments for: | |||
| Depreciation | 17 | 846 | 696 |
| Net finance costs/(income) | 12 | 36,549 | (21,574) |
| Share option expense | - | 857 | |
| (Increase)/decrease in fair value of properties | 15,16 | (11,570) | 123,045 |
| Impairment loss on properties | 21 | 9,548 | - |
| Share of profit in joint ventures | 33 | (1,957) | (3,742) |
| Gain on 100% acquisition of previously held interest in a joint venture | (7,532) | - | |
| Loss on disposal of investment property | - | 3,934 | (1,801) |
| (Profit) on sale of property, plant and equipment | - | (17) | |
| Tax expense/(benefit) | 13 | 33,991 | (2,755) |
| 59,145 | 46,767 | ||
| Change in trade and other receivables | (2,407) | 837 | |
| Change in inventories | (217) | (84) | |
| Change in trading properties and trading properties under construction | 20,21 | (36,734) | (10,546) |
| Change in advances and amounts payable to builders of trading | (1,613) | 12,657 | |
| properties under construction | |||
| Changes in advances from customers | 68,843 | (12,262) | |
| Change in trade and other payables | 23,164 | 613 | |
| Change in VAT recoverable | (3,975) | (2,596) | |
| Change in deferred income | 1,610 | 172 | |
| Cash generated from operating activities | 107,816 | 35,558 | |
| Taxes paid | (3,081) | (373) | |
| Net cash from operating activities | 104,735 | 35,185 | |
| Cash flows from investing activities | |||
| Acquisition of subsidiary net of cash acquired | 33 | (786) | - |
| Proceeds from sale of other investments | 11,825 | 22,301 | |
| Proceeds from disposal of investment property | 114,588 | 1,099 | |
| Proceeds from sale of property, plant and equipment | 137 | 102 | |
| Interest received | 631 | 4,625 | |
| Change in advances and amounts payable to builders | 3,495 | (2,080) | |
| Payments for construction of investment property under development | 16 | (4,865) | (4,554) |
| Payments for the acquisition/renovation of investment property | 15 | (998) | (370) |
| Change in VAT recoverable | (1,565) | (124) | |
| Acquisition of intangible assets | (200) | - | |
| Acquisition of property, plant and equipment | 17 | (484) | (262) |
| Dividends received from joint ventures | - | 380 | |
| Acquisition of other investments | (16,408) | (12,642) | |
| Payments for loan receivable | (3,851) | (508) | |
| Proceeds from repayment of loans receivable | 4,345 | 1,159 | |
| Net cash from/(used in) investing activities | 105,864 | 9,126 |
| 2017 | 2016 | ||
|---|---|---|---|
| Note | US\$'000 | US\$'000 | |
| Cash flows from financing activities | |||
| Acquisition of non-controlling interests | (1,369) | - | |
| Proceeds from loans and borrowings | 43,648 | - | |
| Repayment of loans and borrowings | (117,442) | (13,090) | |
| Interest paid | (50,108) | (44,945) | |
| Net cash used in financing activities | (125,271) | (58,035) | |
| Effect of exchange rate fluctuations | (479) | (2,202) | |
| Net decrease in cash and cash equivalents | 84,849 | (15,926) | |
| Cash and cash equivalents at 1 January | 10,619 | 26,545 | |
| Cash and cash equivalents at 31 December | 24 | 95,468 | 10,619 |
For the year ended 31 December 2017
AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 165 Spyrou Araouzou Street, Lordos Waterfront Building, 5th floor, Flat/office 505, 3035 Limassol, Cyprus. As of 7 September 2016 the Company is a 64.88% subsidiary of Flotonic Limited, a private holding company registered in Cyprus, 100% owned by Mr Lev Leviev. Prior to that, the Company was a 64.88% subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed on the Tel Aviv Stock Exchange ("TASE"). The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.
These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the "Group"). The principal activity of the Group is real estate investment and development.
The principal activity of the Company is the holding of investments in subsidiaries and joint ventures as presented in note 32 "Group Composition".
The Group had experienced, during the several past years, difficult trading conditions driven by macro-economic and geopolitical developments affecting the Russian economy as a whole and a deterioration in demand for real estate assets across the country. Whilst the general economy has shown some signs of stabilisation during the year 2016 and 2017 with higher oil prices, strengthening of the Rouble and inflation on a downward trend, the performance of the real estate sector remains weak.
The Group has recognised a net loss after tax of US\$4.7 million for the twelve month period ended 31 December 2017, however, due to the disposal of two buildings of Ozerkovskaya III, its cash and cash equivalents and marketable securities improved to US\$106.0 million. Its current liabilities decreased to US\$86.8 million due to the reclassification of the AFIMALL City loans to non-current liabilities part, as they it was refinanced and respective agreement was signed in December 2017, and partial repayment of Ozerkovskaya III Loan in December 2017 (note 26).
The management estimates that the Group will continue to generate sufficient operating cash flows from yielding properties such as AFIMall, the hotels and BC Ozerkovskaya III so as to meet loan interest and principal payments of the refinanced loan and new loans. The disposal of two buildings of Ozerkovskaya III generated sale proceeds for partial debt repayment of Ozerkovskaya III Loan Krown Loan facility and refinancing of the outstanding amount by AFIMALL City loan for a 5-year term (note 26). The management succeeded in reducing debt and refinancing loans at lower interest rates and allowing repayment of the principal and securing further operational existence for the foreseeable future. Based on cash flow projection for a year period the management reached a reasonable conclusion that the Group is in a position to
secure further financing for its projects under construction by sales proceeds to generate enough cash to cover its working capital requirements in order to continue its operations in the foreseeable future.
Considering all the above conditions and assumptions, the management concluded that the Group had adequate resources to continue in operational existence for the foreseeable future and adopted the going concern basis in preparing the consolidated financial statements.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the requirements of the Companies Law of Cyprus, Cap. 113.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 April 2018.
These consolidated financial statements are presented in United States Dollars which is the Company's functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated.
In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Information about judgements made in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:
Note 35 – lease classification;
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2017 is included in the following notes:
A number of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.
The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair
value measurements, including Level 3 fair values and reports directly to the chief financial officer.
The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.
Significant valuation issues are reported to the Group's audit committee.
When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirely in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
Further information about the assumptions made in measuring fair values is included in the following notes:
As from 1 January 2017, the Group adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations. This adoption did not have a material effect on the parent's separate financial statements except for the adoption of IFRS 15.
The following Standards, Amendments to Standards and Interpretations have been issued by International Accounting Standards Board ("IASB") but are not yet effective for annual periods beginning on 1 January 2017. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these Standards early.
IFRS 9 "Financial Instruments" (effective for annual periods beginning on or after 1 January 2018)).
In July 2014, the IAS issued the final version of IFRS 9, which replaces the existing guidance in IAS 39 "Financial Instruments: Recognition and Measurement". IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss (ECL) model for calculating impairment on financial assets, and new general hedge accounting requirements. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.
Based on assessments undertaken to date, the adoption of the standard is not expected to have a material impact on the Group's financial statements.
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, FVOCI and FVTPL. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification.
Based on assessments undertaken to date, the adoption of the standard is not expected to have a material impact on the Group's financial statements
IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking ECL model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets.
Under IFRS 9, loss allowances will be measured on either of the following bases:
Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset's credit risk has not increased significantly if the asset has low credit risk at the reporting date. However, lifetime ECL measurement always applies for trade receivables and contract assets without a significant financing component; the entity has chosen to apply this policy also for trade receivables and contract assets with a significant financing component. There is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to corroborate a more lagging default criterion.
Based on assessments undertaken to date, the adoption of the standard is not expected to have a material impact on the Group's financial statements.
The Group is currently evaluating the expected impact of adopting the standard on its financial statements. As such, the expected impact of the standard is not yet known or reasonably estimable.
IAS 40 (Amendments) "Transfers of Investment Property" (effective for annual periods beginning on or after 1 January 2018).
The amendments clarify the requirements on transfers to, or from, investment property. A transfer is made when, and only when, there is an actual change in use i.e. an asset meets or ceases to meet the definition of investment property and there is evidence of the change in use. A change in management intention alone does not support a transfer. In addition, the amendments clarify that the revised examples of evidence of a change in use in the amended version of IAS 40 are not exhaustive.
Based on assessments undertaken to date, the adoption of the amendments is not expected to have a material impact on the Group's financial statements.
IFRS 9 (Amendments) "Prepayment Features with Negative Compensation" (effective for annual periods beginning on or after 1 January 2019).
In October 2017, the IASB issued "Prepayment Features with Negative Compensation (Amendments to IFRS 9)". The amendments address the issue that under pre-amended IFRS 9, financial assets with such features would probably not meet the SPPI criterion and as such would be measured at fair value through profit or loss. The IASB believes that this would not be appropriate because measuring them at amortised cost provides useful information about the amount, timing and uncertainty of their future cash flows. Financial assets with these prepayment features can therefore be measured at amortised cost or fair value through other comprehensive income provided that they meet the other relevant requirements of IFRS 9. The final amendments also contain a clarification in the accounting for a modification or exchange of a financial liability measured at amortised cost that does not result in the derecognition of the financial liability. Based on the clarification, an entity recognises any adjustment to the amortised cost of the financial liability arising from a modification or exchange in profit or loss at the date of the modification or exchange.
The Group is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the amendments is not yet known or reasonably estimable.
IFRIC 22 "Foreign Currency Transactions and Advance Consideration" (effective for annual periods beginning on or after 1 January 2018).
The interpretation clarifies that the transaction date, for the purpose of determining the exchange rate, is the date of initial recognition of the prepayment or deferred income arising from the advance consideration. For transactions involving multiple payments or receipts, each payment or receipt gives rise to a separate transaction date.
Based on assessments undertaken to date, the adoption of the interpretation is not expected to have a material impact on the Group's financial statements.
IFRIC 23 "Uncertainty over Income Tax Treatments" (effective for annual periods beginning on or after 1 January 2019).
FRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency. The key test is whether it is probable that the tax authority will accept the chosen tax treatment, on the assumption that tax authorities will have full knowledge of all relevant information in assessing a proposed tax treatment. The uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty being either the most likely amount or the expected value. The interpretation also requires companies to reassess the judgements and estimates applied if facts and circumstances change. IFRIC 23 does not introduce any new disclosures but reinforces the need to comply with existing disclosure requirements in relation to judgements made, assumptions and estimates used, and the potential impact of uncertainties that are not reflected.
The Group is currently evaluating the expected impact of adopting the interpretation on its financial statements. As such, the expected impact of the interpretation is not yet known or reasonably estimable.
Annual Improvements to IFRSs 2015-2017 Cycle (effective for annual periods beginning on or after 1 January 2019).
In December 2017, the IASB published Annual Improvements to IFRSs 2015–2017 Cycle, containing the following amendments to IFRSs:
IFRS 3 "Business Combinations" and IFRS 11 "Joint Arrangements". The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, then the transaction is a business combination achieved in stages and the acquiring party remeasures the previously held interest in that business at fair value. The amendments to IFRS 11 clarify that when an entity maintains (or obtains) joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
IAS 12 "Income Taxes": the amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) are recognised consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI or equity.
IAS 23 "Borrowing Costs": the amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.
The Group is currently evaluating the expected impact of adopting the improvements on its financial statements. As such, the expected impact of the improvements is not yet known or reasonably estimable.
"Amendments to References to the Conceptual Framework in IFRS Standards" (effective for annual periods beginning on or after 1 January 2020).
In March 2018 the IASB issued a comprehensive set of concepts for financial reporting, the revised "Conceptual Framework for Financial Reporting" (Conceptual Framework), replacing the previous version issued in 2010. The main changes to the framework's principles have implications for how and when assets and liabilities are recognised and derecognized in the financial statements, while some of the concepts in the revised Framework are entirely new (such as the "practical ability" approach to liabilities". To assist companies with the transition, the IASB issued a separate accompanying document "Amendments to References to the Conceptual Framework in IFRS Standards". This document updates some references to previous versions of the Conceptual Framework in IFRS Standards, their accompanying documents and IFRS Practice Statements.
The Group is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the amendments is not yet known or reasonably estimable.
The following standard is expected to have a material impact on the Company's financial statements in the period of initial application
The Group is required to adopt IFRS 15 Revenue from Contracts with Customers from 1 January 2018. The Group has assessed the estimated impact that the initial application of IFRS 15 (see below) will have on its consolidated financial statements. The estimated impact of the adoption of this standard on the Group's equity as at 1 January 2018 is based on assessment undertaken to date and is summarised below. The actual impact of adopting the standard at 1 January 2018 may change because:
| Estimated impact of adoption of IFRS 15 | ||||||||
|---|---|---|---|---|---|---|---|---|
| As reported | Estimated | Estimated | ||||||
| at 31 | adjustments due | adjusted | ||||||
| opening balance | ||||||||
| 2017 adoption of IFRS at 1 January |
||||||||
| In thousands of dollars | 15 | 2018 | ||||||
| Reserves | (301,287) | 97 | (301,190) | |||||
| Retained earnings | (672,719) | 7,405 | (665,315) | |||||
| NCI | (171) | 27 | (144) |
The total estimated adjustment (net of tax) to the opening balance of the Group's equity at 1 January 2018 is US\$7,405 thousand. The principal components of estimated adjustment are as follows:
An increase of US\$7,405 thousand and US\$27 thousand in retained earnings and NCI respectively, due to earlier recognition of revenue and recognition of significant financial component from the contracts for sale of residential properties (DDUs). An increase in reserves of US\$97 thousand is due to foreign currency translation effect.
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. It provides a principles-based approach for revenue recognition, and introduces the concept of recognizing revenue for performance obligations as they are satisfied. The recognition of such revenue is in accordance with five steps to: 1) identifying the contract with the customer; 2) identifying each of the performance obligations included in the contract; 3) determining the transaction price; 4) allocating the transaction price to the performance obligations in the contract; and 5) recognising revenue as each performance obligation is satisfied.
Clarifications to IFRS 15 provide additional application guidance but do not change the underlying principles of the standard. The clarifications relate principally to identifying performance obligations (step 2), accounting for licenses of intellectual property (step 5) and agent vs principal considerations. The clarifications also introduce additional practical expedients on transition in relation to modified and completed contracts
(i) Sale of trading properties
For the sales of trading properties revenue is currently recognised when the risks and rewards of ownership are transferred to the customer.
Under IFRS 15, revenue will be recognised when a customer obtains control of the goods. The revenue from the contracts with customers for sale of trading properties (DDUs) will be recognised over period of time as the contraction progresses. The Group's assessment indicates that this will result in revenue and associated costs to fulfil the contracts being recognised over time, i.e. before the ownership of flats is actually transferred to the customer.
Based on its assessment, the Group does not expect the application of IFRS 15 to have a significant impact on its consolidated financial statements in respect of rental income, hotel income and construction/management fees
(iii) Transition
The Group plans to adopt IFRS 15 using the cumulative method, with the effect of initially applying this standard recognised at the date of initial application (i.e. January 2018). As a result, the Group will not apply the requirements of IFRS 15 to the comparative period presented
The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements.
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.
NCI are measured at their proportionate share of the acquiree's identifiable net assets at the date of acquisition. Subsequently the Group attributes profit or loss and each components of other comprehensive income (OCI) to the NCI even if this results in a deficit balance. Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.
The Group's interests in equity-accounted investees, comprise interests in joint ventures.
A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.
Interests in joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases.
Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equityaccounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Transactions in foreign currencies are translated into the respective functional currencies of Group entities at the exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Foreign currency differences are generally recognised in profit or loss.
The assets and liabilities of foreign operations are translated into US Dollars at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into US Dollars at the exchange rates at the dates of the transactions or average rate for the year for practical reasons. If the volatility of the exchange rates is high for a given year or period the Group uses the average rate for shorter periods i.e. quarters or months for income and expense items.
Foreign currency differences are recognised in OCI and accumulated in the translation reserve, except to the extent that the translation difference is allocated to NCI.
When a foreign operation is disposed of in its entirety or partially such that control or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to NCI. When the Group disposes of only part of joint venture while retaining joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, then foreign currency differences arising from such item form part of the net investment in a foreign operation. Accordingly, such differences are recognised in OCI, and accumulated in the translation reserve.
The table below shows the exchange rates of Russian Roubles which is the functional currency of the Russian subsidiaries of the Group:
| As of: | Exchange rate Russian Roubles for US\$1 |
% Change |
|---|---|---|
| 31 December 2017 | 57.6002 | (5.04) |
| 31 December 2016 | 60.6569 | (16.77) |
| Average rate during: | ||
| Year ended 31 December 2017 | 58.3529 | (12.9) |
| Year ended 31 December 2016 | 67.0349 | 10.0 |
The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss and loans and receivables.
The Group classifies non-derivative financial liabilities into the other financial liabilities category.
The Group initially recognises loans and receivables on the date when they are originated. All other financial assets and financial liabilities are initially recognised on the trade date when the entity becomes a party to the contractual provisions of the instrument.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to
offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such on initial recognition. Directly attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income, are recognised in profit or loss.
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank, cash in hand and deposits on demand .
These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method.
Non-derivative financial liabilities are initially measured at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method.
Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity. Income tax relating to transaction costs of an equity transaction is accounted for in accordance with IAS 12.
Investment property is initially measured at cost and subsequently at fair value with any change therein recognised in profit or loss.
Any gain or loss on disposal of investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. When investment property that was previously classified as property, plant and equipment is sold, any related amount included in the revaluation reserve is transferred to retained earnings.
When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified accordingly. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in OCI and presented in the revaluation reserve. Any loss is recognised in profit or loss.
When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.
Property that is being constructed or developed for future use as investment property is classified as investment property under development and accounted for at fair value until construction or development is complete, at which time it is reclassified as investment property.
Certain development assets within the Group's portfolio that are in very early stages of development process were categorised as "land bank" without ascribing current market value to them. Any value ascribed to such land bank projects other than their cost, would result in a gain or loss to be recognised in profit or loss. This approach was adopted due to abnormal market volatility and will be reviewed in the future once market conditions are more stable.
All costs directly related with the purchase and construction of a property, land lease payments, and all subsequent capital expenditure for the development qualifying as acquisition costs are capitalised.
Borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Capitalisation of borrowing costs commences when the activities to prepare the asset are in process and expenditures and borrowing costs are being incurred. Capitalisation of borrowing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. The capitalisation rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate. The capitalised borrowing cost is limited to the amount of borrowing cost actually incurred.
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalise borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
All hotels are treated as property, plant and equipment due to the Group's significant influence on their management.
If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment.
Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss.
Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group.
Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.
Items of property, plant and equipment are depreciated from the date that they are available for use, or in respect of self-constructed assets, from the date that the asset is completed and ready for use.
The annual depreciation rates for the current and comparative periods are as follows:
| Buildings | 1-2% |
|---|---|
| Office equipment | 10-33⅓% |
| Motor vehicles | 33⅓% |
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.
Goodwill is measured at cost less accumulated impairment losses. In respect of equityaccounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss is allocated to the carrying amount of the equity-accounted investee as a whole.
Trading Properties are measured at the lower of cost and net realisable value. Cost includes expenditure incurred in acquiring the properties and bringing them to their existing condition. In the case of constructed trading properties, cost includes an appropriate share of direct and borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Trading properties under construction are defined as projects in which the Group participates as a contractor or as a promoter, and which include construction work with the intention to sell the entire building as a whole or parts thereof. Each project represents one building or a group of buildings.
A group of buildings is considered one project when the buildings at the same building site are being constructed according to one building plan and under one building license, and are offered for sale at the same time. Trading properties include cost of land or of rights to the land that constitutes the relative portion of the area, on which the construction work on projects is performed, plus the cost of the work executed on the projects as well as other costs allocated
thereto, less the cumulative amounts recognised in profit or loss as cost of trading properties sold up to the end of the reported period.
Direct costs and expenses are charged to projects on a specific basis, whereas borrowing costs are allocated among the projects based on the relative proportion of the costs. Non-specific borrowing costs are capitalised to such qualifying asset, or portion thereof which was not financed with specific credit, by weighted-average rate of the borrowing cost up to the amount of borrowing cost actually incurred. Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision is set up. Buildings that are under construction are classified as trading properties under construction on the statement of financial position.
Land for future development of trading properties is classified as "Inventory of real estate" as non-current asset when it is not expected to develop and sell the properties within the Group's normal operating cycle. It is presented at the lower of cost and net realisable value.
Rental deposits received in advance are classified under non-current liabilities as deferred income and comprise of rental income received from tenants at the beginning of the lease contracts as guarantee against future unpaid rent or damages.
Financial assets not classified as at fair value through profit or loss, including an interest in equity-accounted investee are assessed at each reporting date to determine whether there is objective evidence of impairment.
Objective evidence that financial assets are impaired includes:
For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost.
The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risks characteristics.
In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends.
An impairment loss is calculated as the difference between an asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss.
An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.
At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment property, investment property under development, VAT recoverable, inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets.
The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount and recognised in profit or loss.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.
Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rate basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or investment property under development, which continue to be measured in accordance with the Group's other accounting policies. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on remeasurement are recognised in profit or loss.
Once classified as held-for-sale, intangible assets, and property, plant and equipment are no longer amortised or depreciated and any equity-accounted investee is no longer equity accounted.
Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
The grant-date fair value of equity-settled share-based payment options granted to employees is generally recognised as an expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.
The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period during which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date based on the fair value of share appreciation rights. Any changes in the liability are recognised in profit or loss.
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.
Revenue from sale of trading properties is recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer .
Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.
Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.
Income from hotel operations comprises of accommodation, treatments and other services offered at the hotels operated by the group and sales of food and beverages and are recognised upon offering of the service and the acceptance by the client.
Gross profit is the result of the Group's operations and comprises revenue and other income net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.
Finance income includes interest income on funds invested and net gain on financial assets at fair value through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Finance costs include interest expense on borrowings, unwinding of the discount on provisions and deferred consideration, net loss on financial assets at fair value through profit or loss and impairment losses recognised on financial assets.
Borrowing costs are recognised in profit or loss using the effective interest method, net of interest capitalised.
Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.
Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in OCI.
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends.
Current tax assets and liabilities are offset only if they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment. In Group's financial statements, a current tax asset of one entity in the group is offset against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or receive such a net payment or to recover the asset and settle the liability simultaneously.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss and temporary differences related to investments in subsidiaries and joint arrangements to the extent that the Group is able to control the timing of reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future.
Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available
against which they can be used. Future taxable profits are determined based on business plans for individual subsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves.
Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. For this purpose the carrying amount of investment property measured at fair value is presumed to be recovered through sale and the Group has not rebutted this presumption.
Deferred tax assets and liabilities are offset if, and only if, the entity has a legally enforceable right to set off current tax liabilities and assets; and the deferred tax liabilities and assets relate to income taxes levied by the same tax authority on either the same taxable entity or different taxable entities, but these entities intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realised simultaneously for each future period in which these differences reverse.
The provision for taxation either current or deferred is based on the tax rate applicable to the country of residence of each subsidiary.
A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:
Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale.
When an operation is classified as a discontinued operation, the comparative statement of profit or loss and OCI is re-presented as if the operation had been discontinued from the start of the comparative year.
The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to the owners of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to the owners of the Company and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. All segments results are reviewed regularly by the Group's management to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
The Group has five reportable segments, as described below, which are the Group's strategic business units. The strategic business units offer different types of real estate products and services and are managed separately because they require different marketing strategies as they address different types of clients. For each strategic business unit the Group's management reviews internal management reports on at least monthly basis. The following summary describes the operation in each of the Group's reportable segments.
Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Group's management team. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Intersegment pricing is determined on an arm's length basis.
| Development projects | Asset management |
Hotel Operation |
Land bank | Other | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Residential projects | Total | |||||||||||
| 2017 US\$'000 |
2016 US\$'000 |
2017 US\$'000 |
2016 US\$'000 |
2017 US\$'000 |
2016 US\$'000 |
2017 US\$'000 |
2016 JS\$'000 |
2017 US\$'000 |
2016 US\$'000 |
2017 US\$'000 |
2016 US\$'000 |
|
| External revenues Inter-segment revenue Seament revenue |
61,971 24,241 86,212 |
55.622 981 56.602 |
85,665 5.707 91,372 |
69,386 9.414 78,800 |
29,298 4 29,302 |
11,298 4 11,302 |
2.055 26 2,081 |
1.774 21 1,795 |
62 10.195 10.257 |
216 8.268 8,483 |
179,051 40.173 219,224 |
138,296 18,688 156,984 |
| Segment (loss) profit before tax Interest income |
(14, 259) 136 |
(3,570) 2 |
37,454 93 |
(10.526) 8 |
9,360 145 |
3.069 | 7.643 ۰ |
(25.013) | (9, 171) | (8,556) ۰ |
31,027 374 |
(44, 596) 11 |
| Interest expense Depreciation Share of profit/(loss) of |
(188) (49) |
$\overline{\phantom{a}}$ (39) |
(47,969) (53) |
(44, 012) (94) |
(1, 511) (685) |
(497) | ۰ (3) |
(2) | ۰ (56) |
۰ (64) |
(49,668) (846) |
(44, 012) (696) |
| joint-ventures Loss on disposal of properties |
۰ | ٠ $\blacksquare$ |
(3,934) | ٠ | 1957 | 3.742 | ٠ | ٠ | ۰ | ٠ $\blacksquare$ |
1,957 (3,934) |
3.742 $\overline{\phantom{a}}$ |
| Other material non-cash items: Impairment loss on properties |
(9,548) | (9,548) | ||||||||||
| Increase/(decrease) in fair value of properties |
(2, 163) | (3,970) | 7.041 | (91, 254) | ٠ | 6.692 | (27.821) | ۰ | ۰ ۰ |
11,570 | (123, 045) | |
| Segment assets Capital expenditure Segment liabilities |
418,891 97,823 145,918 |
356.250 58,117 65,462 |
866,433 998 622,352 |
917,890 370 668,273 |
81,487 61,360 |
27,452 ۰ |
196,326 4,278 .646 |
177,076 401 |
1,270 1,409 |
904 417 1.093 |
1.564.407 103,099 832,685 |
1,479,572 59,305 734,828 |
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items.
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Revenues | ||
| Total revenue for reportable segments | 219,224 | 156,984 |
| Elimination of inter-segment revenue | (40,173) | (18,688) |
| Consolidated revenue | 179,051 | 138,296 |
| Profit before tax | ||
| Total profit before tax for reportable segments | 31,027 | (44,596) |
| Unallocated amounts: | ||
| Other profit or loss | (3,657) | (9,843) |
| Share of the after tax loss of joint ventures | 1,957 | 3,742 |
| Consolidated profit/(loss) before tax | 29,327 | (50,697) |
| Assets | ||
| Total assets for reportable segments | 1,564,407 | 1,481,282 |
| Other unallocated amounts | 39,881 | 26,484 |
| Consolidated total assets | 1,604,288 | 1,507,766 |
| Liabilities | ||
| Total liabilities for reportable segments | 832,685 | 735,137 |
| Other unallocated amounts | 656 | 332 |
| Consolidated total liabilities | 833,341 | 735,469 |
| Reportable segment totals US\$'000 |
Adjustments US\$'000 |
Consolidated totals US\$'000 |
|
|---|---|---|---|
| Other material items 2017 | |||
| Interest income | 374 | 324 | 698 |
| Interest expense | (49,668) | - | (49,668) |
| Capital expenditure | 103,099 | - | 103,099 |
| Depreciation | (846) | - | (846) |
| Decrease in fair value of properties | (9,548) | - | (9,548) |
| Impairment loss on properties | 11,570 | - | 11,570 |
| Reportable | Consolidated | ||
|---|---|---|---|
| segment totals | Adjustments | totals | |
| US\$'000 | US\$'000 | US\$'000 | |
| Other material items 2016 | |||
| Interest income | 11 | 2,134 | 2,145 |
| Interest expense | (44,012) | (24) | (44,036) |
| Capital expenditure | 59,305 | - | 59,305 |
| Depreciation | (696) | - | (696) |
| Decrease in fair value of properties | (123,045) | - | (123,045) |
Geographically the Group operates only in Russia and has no significant revenue or assets in other countries or geographical areas. Therefore no geographical segment reporting is presented.
There was no concentration of revenue from any single customer in any of the segments.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Investment property rental income | 87,852 | 72,299 |
| Sales of trading properties (note 22) | 61,844 | 54,484 |
| Hotel operation income | 29,189 | 11,298 |
| Construction consulting/management fees | 166 | 215 |
| 179,051 | 138,296 |
| Other income consists of: | 2017 US\$ '000 |
2016 US\$ '000 |
|---|---|---|
| Penalties charged to tenants Reimbursement of depositary fees Reimbursement of property tax Profit on sale of property, plant and equipment Sundries |
317 - 1,918 - 1,584 3,819 |
147 480 1,770 17 1,131 3,545 |
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Maintenance, utility and security expenses | 19,475 | 12,147 |
| Agency and brokerage fees | 2,354 | 623 |
| Advertising expenses | 6,843 | 5,496 |
| Salaries and wages | 15,545 | 10,276 |
| Consultancy fees | 651 | 504 |
| Depreciation | 740 | 578 |
| Insurance | 527 | 635 |
| Rent | 1,897 | 1,429 |
| Property and other taxes | 8,908 | 6,338 |
| Other operating expenses | 114 | 810 |
| 57,054 | 38,836 |
The average number of employees employed by the Group during the year 2017 and 2016 were 1,159.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Consultancy fees | 444 | 1,841 |
| Legal fees | 1,362 | 814 |
| Auditors' remuneration | 811 | 519 |
| Valuation expenses | 60 | 94 |
| Directors' remuneration | 1,334 | 1,361 |
| Salaries and wages | 52 | 25 |
| Depreciation | 106 | 118 |
| Insurance | 143 | 208 |
| Provision for Doubtful Debts-(reversal) | 147 | (1,304) |
| Share option expense | - | 857 |
| Donations | 78 | 674 |
| Other administrative expense | 1,468 | 1,382 |
| 6,005 | 6,589 |
During 2017 the Company's statutory audit firm fees for audit services amounted to US\$202 thousand (2016: US\$171 thousand), for other assurance services amounted to US\$599 thousand (2016: US\$339 thousand) and for non-audit services amounted to US\$10 thousand (2016: US\$9 thousand).
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Prior years' VAT non recoverable (note 19) Sundries |
105 2,281 |
121 1,209 |
| Net finance income/(costs) | 2,386 | 1,330 |
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Interest income | 698 | 2,145 |
| Net change in fair value of financial assets | 50 | - |
| Translation reserve reclassified upon disposal of subsidiaries | - | - |
| Loans payable written off | - | - |
| Foreign exchange gain | 12,371 | 63,657 |
| Finance income | 13,119 | 65,802 |
| Interest expense on loans and borrowings | (49,668) | (44,036) |
| Net change in fair value of financial assets | - | (174) |
| Other finance costs | (722) | (380) |
| Loans receivable written off | - | (18) |
| Finance costs | (50,390) | (44,608) |
| Net finance income/(costs) | 37,271 | 21,194 |
The net foreign exchange gain recognised during 2017 is a result of the weakening of the US Dollar to the Russian Rouble by 5%, during 2017. The recognised gain is mainly attributable to the US Dollar denominated loans held by Russian subsidiaries or branches where the functional currency is the Russian Rouble.
Subject to the provisions of IAS23 "Borrowing costs" in 2017 the Group did not capitalise any amount (2016 Nil) of financing costs to the projects that are in construction phase.
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Current tax expense | ||
| Current year | (12,799) | 282 |
| Adjustment for prior years | (64) | (865) |
| (12,863) | (583) | |
| Deferred tax benefit | ||
| Origination and reversal of temporary differences | (21,128) | (2,172) |
| Total tax expense | (33,991) | (2,755) |
The provision for taxation either current or deferred is based on the tax rates applicable to the country of residence of each Group entity. Cypriot entities are subject to 12.5% corporate rate whereas Russian subsidiaries and branches are subject to 20% corporate rate.
| % | 2017 US\$ '000 |
% | 2016 US\$ '000 |
|
|---|---|---|---|---|
| Loss for the year after tax Total tax expense/(benefit) Loss before tax |
(4,664) 33,991 29,327 |
(47,942) (2,755) 50,697 |
||
| Tax using the Company's domestic tax rate Effect of tax rates in foreign jurisdictions Tax exempt income Non-deductible expenses Change in estimates related to prior years Current year losses for which no deferred tax asset recognised |
12.5 7.9 (111.1) 195.3 7.0 4.3 |
3,671 2,315 (32,595) 57,270 2,057 1,273 |
(12.5) (5.4) (56.4) 48.07 (1.7) 22.5 |
(6,332) (2,754) (28,758) 24,371 (865) 11,403 |
| 115.9 | 33,991 | (5.4) | (2,755) |
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Basic earnings per share | ||
| Loss attributable to ordinary shareholders | (4,918) | (47,872) |
| Shares in | Shares in | |
| Weighted average number of ordinary shares | thousands | thousands |
| Weighted average number of shares | 1,047,694 | 1,047,694 |
| Earnings per share (cent) | (0.47) | (4.57) |
Reconciliation of carrying amount
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance 1 January | 915,350 | 933,700 |
| Reclassification to trading properties | 998 | 370 |
| Renovations/additional cost | (140,026) | (500) |
| Fair value adjustment | 18,218 | (92,801) |
| Effect of movement in foreign exchange rates | 23,520 | 74,581 |
| Balance 31 December | 818,060 | 915,350 |
Investment property comprises mainly retail and commercial property which is operated by the Group and is leased out to tenants.
The investment property was revalued by independent appraisers on 31 December 2017. The cumulative adjustments, for all projects, are shown in "Fair value adjustment" in the table above.
The increase/(decrease) due to the effect of the foreign exchange rates is a result of the weakening of the US Dollar to the Russian Rouble by 5%, during 2017 (2016: 17%).
The disposals of investment property represent the below two transactions:
Measurement of fair value
The fair value of investment property was determined by external, registered independent property appraisers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The independent appraisers calculate the fair value of the Group's investment property portfolio every six months. The same applies for investment property under development in note 16.
The fair value measurement for investment property of US\$818,060 thousand (2016: US\$915,350 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
The table presented in reconciliation of carrying amount above shows the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties of the Group, are categorised as level 3.
The following tables show the valuation technique used in measuring the fair value of investment property, as well as the significant unobservable inputs used.
| Valuation technique | Significant unobservable inputs |
Inter-relationship between key unobservable inputs and fair value measurement |
|---|---|---|
| Discounted cash flows: The valuation model considers the present value of net cash flows to be generated from each property, taking into account rental rates and expected rental growth rate, occupancy rate and void periods together reflected in vacancy rates, construction cost, opening and completion dates, lease incentive costs such rent free periods, taxes and other costs not paid by tenants. The expected net cash flows are discounted using the risk-adjusted discount rates plus the final year stream is discounted with an all-risk yield. Among other factors, discount rate estimation considers type of property offered (retail, |
Average Rental rates per sq.m.: Office prime class A \$510, class B \$215-\$303, Retail \$610-\$926 Expected market rental growth: Office 3-4% average; Retail 1-4% averageVacancy rate Office class A 2% class B 10- 12.5%; Retail 4.5-6.5% Risk-adjusted discount rates 12%-21% All-Risk Yield 9.0%-15.25% |
The estimated fair value would increase/(decrease) if : Average rental rates were higher/(lower) Expected market rental growth was higher/(lower) Void periods were shorter/(longer) The vacancy rates were lower/(higher) The risk-adjusted discount rates were lower (higher) All-risk yields were lower/(higher) |
| Investment property | Type of | Rental | Expected | Vacancy | Risk | All-risk |
|---|---|---|---|---|---|---|
| property | rates | market | Rate, % | adjusted | yield | |
| \$ per | rental | discount | ||||
| annum | growth | rates | ||||
| per sq.m | ||||||
| Aquamarine III | Office, Class A | 510 | 4% | 2% | 12% | 9% |
| AFI Mall | Retail | 756 | 1% | 6.5% | 15% | 9.75% |
| Office 303 | ||||||
| Plaza IB | Office, Class B | Retail 926 | 3% | 12,5% | 18% | 13.5% |
| Plaza II | Retail | 610 | 4% | 4.5% | 21% | 9.75% |
| Paveletskaya I | Office, Class B | 215 | 3% | 12% | 18% | 15.0% |
| H2O | Office, Class B | 215 | 3% | 12% | 17.75% | 15.25% |
| Riverside station | Office, Class B | 303 | 3% | 10% | 17.5% | 13.5% |
commercial, office) quality of building and its location, tenant
credit quality and lease terms.
Investment properties at fair value are categorised in the following:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Retail properties | 696,000 | 666,500 |
| Office space properties | 122,060 | 248,850 |
| 818,060 | 915,350 |
Fair value sensitivity Analysis
Presented below is the effect on the fair value of the AFIMALL project, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.
| AFIMALL City | ||||
|---|---|---|---|---|
| Capitalisation Rate | 8.75% | 9.75% | 10.75% | |
| Market value (US\$'000) | 743,700 | 696,000 | 657,200 | |
| Rental income | -10.00% | -5.00% | 0.00% | 5.00% |
| Market value (US\$'000) | 647,600 | 671,800 | 696,000 | 720,200 |
| Occupancy rate | 4.50% | 6.50% | 8.50% | |
| Market value (US\$'000) | 711,400 | 696,000 | 680,700 | |
| Discount rate | 14.50% | 14.75% | 15.00% | 15.25% |
| Market value (US\$'000) | 708,000 | 702,000 | 696,000 | 690,100 |
Presented below is the effect on the fair value of the rest of the investment property projects, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.
| AFIMALL City | |||||
|---|---|---|---|---|---|
| In thousands of | -10% | -5% | 0 | 5% | 10% |
| dollars | |||||
| ERVs | |||||
| Yields | |||||
| -0.5 | 116,260 | 122,230 | 127,900 | 133,840 | 139,610 |
| -0.25 | 113,520 | 119,380 | 124,920 | 130,460 | 136,310 |
| 0 | 111,010 | 116,530 | 122,060 | 127,500 | 133,020 |
| 0.25 | 108,470 | 113,900 | 119,310 | 124,720 | 130,140 |
| 0.5 | 106,150 | 111,350 | 116,660 | 121,960 | 127,270 |
| -0.5 | 116,260 | 122,230 | 127,900 | 133,840 | 139,610 |
| -0.25 | 113,520 | 119,380 | 124,920 | 130,460 | 136,310 |
| 2017 | 2016 | |
|---|---|---|
| Reconciliation of carrying amount | US\$ '000 | US\$ '000 |
| Balance 1 January | 232,900 | 238,925 |
| Construction costs | 4,865 | 4,554 |
| Transfer to trading properties under construction (note 21) | (74,100) | - |
| Fair value adjustment | (6,648) | (30,244) |
| Effect of movements in foreign exchange rates | 6,223 | 19,665 |
| Balance 31 December | 163,240 | 232,900 |
On 31 March 2017 the Group transferred "Bolshaya Pochtovaya" project to trading properties under construction. The transfer was performed following the change in use evidenced by the commencement of development of trading properties with a view to sell. The amount of US\$74,100 thousand represents the fair value of the project at the date of the transfer. The fair value was based on the valuation provided by the independent appraisers on 31 December 2016 which according to management assessment was not significantly different from the fair value at the date of change in us.
The investment property under development was revalued by independent appraisers on 31 December 2017. The cumulative adjustments, for all projects, are shown in line "Fair value adjustment" in the table above.
The increase due to the effect of the foreign exchange rates is a result of the weakening of the US Dollar to the Russian Rouble by 5%, during 2017 (2016: 17%
The fair value measurement for investment property under development of US\$163,240 thousand (2016: US\$232,900 thousand) has been categorised as a level 3 fair value based on the inputs to the valuation technique used.
The table presented above is the reconciliation from the opening balances to the closing balances for level 3 fair values, since all fair values of investment properties under development of the Group, are categorised as level 3.
The following tables show the valuation technique used in measuring the fair value of investment property under development, as well as the significant unobservable inputs used.
| Valuation technique | Significant unobservable inputs |
Inter-relationship between key unobservable inputs and fair value measurement |
||
|---|---|---|---|---|
| Discounted cash flows: The valuation model considers the present value of net cash flows to be generated from each property, taking into account rental rates and expected rental growth rate, occupancy rate and void periods together reflected in vacancy rates, construction cost, opening and completion dates, lease incentive costs such rent free periods, taxes and other costs not paid by tenants. The expected net cash flows are discounted using the risk-adjusted discount rates plus the final year stream is discounted with an all-risk yield. Among other factors, discount rate estimation considers type of property offered (retail, commercial, office) quality of building and its |
Average Rental rates per sq.m.: Office prime class-\$600, class B \$160, Retail \$140-\$800 Expected market rental growth: Office 3-4% average; Retail 3-4% average Vacancy rate: Office prime class A 5%, class B 10%; Retail 0-10% Risk-adjusted discount rates (16%-23.5%) All-Risk Yield 9.25%-13% |
The estimated fair value would increase/(decrease) if : Average rental rates were higher/(lower) Expected market rental growth was higher/(lower) Void periods were shorter/(longer) The vacancy rates were lower/(higher) The risk-adjusted discount rates were lower (higher) All-risk yields were lower/(higher) |
| Investment property under development |
Type of property |
Rental rates \$ per annum per sq.m |
Expect ed market rental growth |
Vacancy Rate, % |
Risk adjusted discount rates |
All-risk yield |
|---|---|---|---|---|---|---|
| Starokaluzhskoye shosse |
Retail | 140-228 | 4% | 0% | 16% | 11.5% |
| Plaza IC | Office, Class A |
Office-600 Retail-800 |
4% | 5% | 22.5% | 9.25% |
| Plaza IV | Office, Class A |
Office-600 Retail-800 |
4% | 5% | 23.5% | 9.25% |
| Kosinskaya | Office, Class B |
Office-160 Retail-229 |
3% | 10% | 18.0% | 13% |
Presented below is the effect on the fair value of the investment property under development projects, of an increase/(decrease) in the below inputs at the reporting date. This analysis assumes that all other variables remain constant.
location, tenant credit quality and
lease terms.
| In thousands of dollars ERVs Yields |
-10% | -5% | 0 | 5% | 10% |
|---|---|---|---|---|---|
| -0.5 | 155,307 | 170,704 | 186,002 | 201,499 | 216,797 |
| -0.25 | 144,485 | 159,378 | 174,271 | 189,063 | 204,056 |
| 0 | 134,363 | 148,852 | 163,241 | 177,629 | 192,018 |
| 0.25 | 124,643 | 138,727 | 152,712 | 166,597 | 180,581 |
| 0.5 | 115,623 | 129,204 | 142,785 | 156,266 | 169,846 |
In addition to the above table, if the development costs were higher by 10%, then the fair value of investment property under development projects would be lower by US\$16,000 thousand and vice-versa.
| Buildings | |||||
|---|---|---|---|---|---|
| under | Land & | Office | Motor | ||
| construction | Buildings | Equipment | Vehicles | Total | |
| US\$ '000 | US\$ '000 | US\$ '000 | US\$ '000 | US\$ '000 | |
| Cost | |||||
| Balance at 1 January 2017 | 3,947 | 29,725 | 2,426 | 963 | 37,061 |
| Additions | - | 302 | 176 | 6 | 484 |
| Additions due to acquisition of previously held interest in a joint venture |
- | 45,418 | 16 | 146 | 45,580 |
| Disposals | - | (167) | (21) | - | (188) |
| Effect of movement in foreign exchange rates | 294 | 1,168 | 130 | 48 | 1,640 |
| Balance at 31 December 2017 | 4,241 | 76,446 | 2,727 | 1,163 | 84,577 |
| Accumulated depreciation | |||||
| Balance at 1 January 2017 | - | 2,863 | 2,202 | 781 | 5,846 |
| Charge for the year | - | 662 | 99 | 85 | 846 |
| Disposals | - | (30) | (21) | - | (51) |
| Effect of movement in foreign exchange rates | - | 141 | 120 | 42 | 303 |
| Balance at 31 December 2017 | - | 3,636 | 2,400 | 908 | 6,944 |
| Carrying amount | |||||
| At 31 December 2017 | 4,241 | 72,810 | 327 | 255 | 77,633 |
| Buildings under construction US\$ '000 |
Land & Buildings US\$ '000 |
Office Equipment US\$ '000 |
Motor Vehicles US\$ '000 |
Total US\$ '000 |
|
| Cost | |||||
| Balance at 1 January 2016 | 3,319 | 24,552 | 1,987 | 840 | 30,698 |
| Additions | - | 48 | 77 | 137 | 262 |
| Disposals | - | (101) | (13) | (179) | (293) |
| Effect of movement in foreign exchange rates | 628 | 5,226 | 375 | 165 | 6,394 |
| Balance at 31 December 2016 | 3,947 | 29,725 | 2,426 | 963 | 37,061 |
| Balance at 1 January 2016 | 3,319 | 24,552 | 1,987 | 840 | 30,698 |
| Accumulated depreciation | |||||
|---|---|---|---|---|---|
| Balance at 1 January 2016 | - | 1,972 | 1,740 | 706 | 4,418 |
| Charge for the year | - | 524 | 124 | 48 | 696 |
| Disposals | - | (86) | (13) | (109) | (208) |
| Effect of movement in foreign exchange rates | - | 453 | 351 | 136 | 940 |
| Balance at 31 December 2016 | - | 2,863 | 2,202 | 781 | 5,846 |
| Carrying amount | |||||
| At 31 December 2016 | 3,947 | 26,862 | 224 | 182 | 31,215 |
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Long-term loans | ||
| Loans to joint ventures (note 38) | - | 15,745 |
| Loans to non-related companies | 1,669 | 18 |
| 1,669 | 15,763 | |
| Short-term loans | ||
| Loans to non-related companies | 1,090 | 7 |
Terms and conditions of outstanding loans were as follows:
| Currency | Nominal interest rate |
Year of maturity |
2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|---|---|---|
| Unsecured loans to joint ventures | USD | 11.5% | 2020 | - | 11,300 |
| RUR | 14% | 2020 | - | 4,445 | |
| Unsecured loans to non-related | |||||
| companies | RUR | 6% | 2021 | 1,632 | - |
| RUR | 5-7% | 2018 | 663 | - | |
| USD | 3.08% | 2018 | 427 | - | |
| RUR | - | 2017 | - | 7 | |
| RUR | 2.5% | 2020 | 28 | 10 | |
| RUR | 0.1-5.5% | 2019 | 9 | 8 | |
| 2,759 | 15,770 |
Represents VAT paid on construction costs and expenses which according to the Russian VAT law can be recovered upon completion of the construction. Part of this VAT is expected to be recovered after more than 12 months from the balance sheet date. Due to the uncertainties in the Russian tax and VAT law, the management has assessed the recoverability of this VAT and has provided for any amounts that their recoverability was deemed doubtful or questionable (see note 11). Under Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required
documentation is presented to the VAT authorities. The Group was successful in recovering VAT during the year, and it is estimated that part of the VAT recoverable as at the year-end will be recovered within the next 12 months, which is classified as trade and other receivables, note 23.
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Balance 1 January | 6,854 | 2,062 |
| Transfer from trading properties under construction (note 21) | 63,202 | 53,480 |
| Reclassification to property, plant and equipment | - | - |
| Disposals | (59,747) | (49,475) |
| Effect of movements in exchange rates | 483 | 787 |
| Balance 31 December | 10,792 | 6,854 |
Trading properties comprise unsold apartments and parking spaces. The transfer from trading properties under construction represents the completion of the construction of a number of flats, offices and parking places of "Odinburg" project. During the year the sale of 665 flats, 8 offices and 76 parking places were recognised, upon transferring of the rights to the buyers according to the signed acts of transfer, in the income statement.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance 1 January | 243,327 | 204,392 |
| Transfer from inventory of real estate | - | 21,543 |
| Transfer from investment property under development (note 16) | 74,100 | - |
| Transfer to trading properties (note 20) | (63,202) | (53,480) |
| Construction costs | 96,481 | 54,428 |
| Impairment | (9,548) | - |
| Effect of movements in exchange rates | 8,577 | 16,444 |
| Balance 31 December | 349,735 | 243,327 |
Trading properties under construction comprise "Odinburg", "AFI Residence Paveletskaya", "Botanic Garden" and "Bolshaya Pochtovaya" projects which involve primarily the construction of residential properties for further details on the transfer of the"Bolshaya Pochtovaya" refer to note 16.
The properties were tested for impairment at year end based on internal valuation. An impairment loss of US\$9,548 thousand was recognised in the profit or loss so as to present the properties at their lower of cost or net realisable value.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Equity securities – available for sale | 20 | 20 |
| Investment in listed debt securities – held for trading | 5,255 | 6,068 |
| Investment in fund – designated as at FVTPL | 5,240 | - |
| 10,515 | 6,088 |
Investment in fund (Private Mutual Fund) designated as at FVTPL aims to deliver around 10% p.a. absolute returns to investors via investments into financial markets.
Listed debt securities classified as held for trading have stated interest rates of 4.5%. (2016: 3.22%) and mature within a year.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Advances to builders | 29,313 | 27,019 |
| Amounts receivable from related parties (note 37) | 109 | 267 |
| Trade receivables net | 3,458 | 3,427 |
| Other receivables | 21,713 | 3,955 |
| VAT recoverable (note 19) | 9,889 | 4,067 |
| Tax receivable | 5,920 | 3,692 |
| 70,402 | 42,427 |
Trade receivables are presented net of an accumulated provision for doubtful debts of US\$82 thousand (2016: US\$8,285 thousand).
Other receivables include an amount of US\$16 million representing the 11.85% balance of the total consideration from the disposal of the two buildings of Aquamarine III Business Centre, for further details on the disposal refer to note 15.
Cash and cash equivalents consist of:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Cash at banks | 95,102 | 10,356 |
| Cash in hands | 366 | 263 |
| Cash and cash equivalents as per statement of cash flows | 95,468 | 10,619 |
| 2017 | 2016 |
|---|---|
| US\$ '000 | US\$ '000 |
| 2,000 | 2,000 |
| 524 | 524 |
| 524 | 524 |
| 1,048 | 1,048 |
There were no changes to the authorised or the issued share capital of the Company during the year ended 31 December 2017.
It represents the share premium on the issue of shares on 31 December 2006 for the conversion of the shareholders' loans to capital US\$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US\$14, and the nominal value of the shares, US\$0.001, after deduction of all listing expenses. An amount of US\$1,399,900 thousand less US\$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US\$524 thousand was capitalised as a bonus issue.
The Company had established an employee share option plan operated by the Board of Directors, which was responsible for granting options and administrating the employee share option plan. Eligible were employees and directors, excluding independent directors, of the Company. The employees share option plan was discretionary and options would be granted only when the Board so determined at an exercise price derived from the closing middle market price preceding the date of grant. No payment would be required for the grant of the options. In any 10 year period not more than 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan.
If a participant ceased to be employed his options would normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options might be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan would rank equally with all other shares at the time of issue. The Board of Directors might satisfy, (with the consent of the participant), an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs.
Following the lapse of the ten years period all options have vested during the year 2016 and expired during the year 2017.
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign
exchange differences on loans designated as loans to an investee company which are accounted for as part of the investor's investment (IAS21.15) as their repayment is not planned or likely to occur in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve.
Represents the effect of the acquisition, in 2015, of the 10% non-controlling interests in Bioka Investments Ltd and its subsidiary Nordservice LLC previously held at 90% and the effect of the acquisitions during the period of the 5% non-controlling interests in Beslaville Management Limited and its subsidiary Zheldoruslugi LLC previously held at 95% and of the 26% non-controlling interest in Bizar LLC previously held at 74%, refer to note 34 for further details.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Non-current liabilities | ||
| Secured bank loans | 492,484 | 627,074 |
| Current liabilities | ||
| Secured bank loans | 86,468 | 459 |
| Unsecured loans from other non-related companies | 307 | 289 |
| 86,775 | 748 |
A secured loan from VTB Bank JSC ("VTB") signed on 22 June 2012 by one of the Group's subsidiary, Bellgate Construction Ltd ("Bellgate") with a maturity date in April 2018, which was refinanced through a new loan, signed on 28 December 2017 by the Group's subsidiary Bellgate. This loan facility agreement refinanced the existing Bellgate loan from VTB and will also be used to repay the remainder of Ozerkovskaya III loan. Bellgate will receive the New Loan in five tranches, in Euros and in Russian Rubles. The blended interest rate on the New Loan is circa 5.6% (assuming current EUR/RUR exchange rate and current Russian Central Bank key lending rate). The interest and the principal of the New Loan are to be paid quarterly, while the term of the loan is 5 years. After drawdown of all the tranches, Bellgate will have loan obligations in Russian Rubles of a maximum amount of RUR9.6 billion and in Euros in the equivalent of US\$360 million. During January and February, the subsidiary drew-down all above mentioned amounts.
rate of the Russian Central Bank key lending rate + 1.5%. The principal on the loan is payable monthly, while the interest is payable quarterly. The loan matures in July 2019.
The above loans contain the below covenants:
Terms and conditions of outstanding loans were as follows:
| Currency | Nominal interest rate |
Year of maturity |
2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|---|---|---|
| Secured loan from VTB Bank to Bellgate | RUR | 9.5% | 2018- 2022 |
167,545 | 159,102 |
| Secured loan from VTB Bank to Bellgate | USD | 3m USD LIBOR+ 5.02% |
2018- 2022 |
276,887 | 276,886 |
| Secured loan from VTB Bank to Krown | USD | 3m USD LIBOR+ 7% |
2017- 2018 |
83,404 | 191,545 |
| Secured loan from VTB Bank to Sanatorium Plaza |
USD | 3m USD LIBOR+ 4.5% |
2018- 2022 |
21,404 | - |
| Secured loan from VTB Bank to Sanatorium Plaza Secured loan from VTB Bank to Sanatorium |
USD | 5.5% | 2018- 2022 2018- |
11,515 | - |
| Plaza SPA | USD | 5.5% | 2022 on |
18,196 | - |
| Other | RUR | 3-12% | demand | 308 | 289 |
| 579,259 | 627,822 |
The secured bank loans are secured over investment property, investment property under development and hotels with a carrying amount of US\$696,000 thousand (2016: US\$865,000 thousand), US\$NIL (2016: US\$28,300 thousand) US\$56,706 thousand (2016: US\$15,290 thousand) respectively.
The loans and borrowings are payable as follows:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Less than one year | 86,775 | 748 |
| Between one and five years | 492,484 | 627,074 |
| More than five years | - | - |
| 579,259 | 627,822 |
Deferred tax (assets) and liabilities are attributable to the following:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Investment property | 69,885 | 73,531 |
| Investment property under development | 9,890 | 3,165 |
| Property, plant and equipment | 10,376 | 952 |
| Trading properties | (1,476) | (391) |
| Trading properties under construction | 25,478 | 16,056 |
| Trade and other receivables | (3,702) | (5,777) |
| Trade and other payables | 1,193 | 1,737 |
| Other items | (29) | (40) |
| Tax losses carried forward | (68,963) | (74,299) |
| Deferred tax liability | 42,652 | 14,934 |
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Trade payables | 13,756 | 8,490 |
| Payables to related parties (note 37) | 183 | 427 |
| Amount payable to builders | 15,340 | 13,795 |
| VAT and other taxes payable | 28,982 | 5,681 |
| Other payables | 6,845 | 2,564 |
| 65,106 | 30,957 |
The above are payable within one year and bear no interest.
Include an amount of US\$24,618 thousand of tax payable arising from the disposal of the two buildings of Aquamarine III Business Centre, for further details on the disposal refer to note 15.
Represent advances received from customers for the sale of residential properties at "Odinburg", "AFI Residence Paveletskaya", "Botanic Garden" and "Bolshaya Pochtovaya" projects. During the year the Group has sold 676 apartments, 311 parking places and 99 offices and received additional down payments from customers.
Represents rental income received from tenants at the beginning of the lease contracts as guarantee against future unpaid rent or damages.
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
| Carrying amount | Fair value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Loans Receivable |
Trade and other receivables |
Other investments |
Cash and cash equivalents |
Other financial liabilities |
Total | Level 1 | Level 2 | Level 3 | Total | |
| 31 December 2017 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 US\$'000 | US\$'000 | |
| Financial assets measured at fair value | ||||||||||
| Investment in fund | $\overline{a}$ | 5,240 | ٠ | $\overline{\phantom{a}}$ | 5,240 | ٠ | ٠ | 5,240 | 5,240 | |
| Investment in listed debt securities | $\overline{\phantom{a}}$ | 5,255 | $\overline{\phantom{a}}$ | ٠ | 5,255 | 5.255 | ٠ | $\sim$ | 5,255 | |
| ٠ | $\sim$ | 10.495 | $\sim$ | ٠ | 10,495 | |||||
| Financial assets not measured at fair value | ||||||||||
| Loans receivable | 2,759 | $\overline{\phantom{0}}$ | $\overline{\phantom{a}}$ | 2,759 | ||||||
| Trade and other receivables | ٠ | 25,280 | $\overline{\phantom{a}}$ | ٠ | ۰ | 25,280 | ||||
| Cash and cash equivalents | ٠ | ٠ | 95,468 | ٠ | 95,468 | |||||
| 2,759 | 25,280 | $\overline{\phantom{a}}$ | 95,468 | ٠ | 123,507 | |||||
| Financial liabilities not measured at fair value | ||||||||||
| Interest bearing loans and borrowings | ۰ | (579, 259) | (579.259) | (579, 415) | $\sim$ | (579, 415) | ||||
| Trade and other payables | $\overline{\phantom{a}}$ | $\sim$ | ۰ | $\sim$ | (25, 230) | (25, 230) | ||||
| ٠ | $\overline{\phantom{a}}$ | $\overline{\phantom{a}}$ | (604, 489) | (604, 489) |
| Carrying amount | Fair value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Loans Receivable |
Trade and other receivables |
Other investments |
Cash and cash equivalents |
Other financial liabilities |
Total | Level 1 Level 2 | Level 3 | Total | ||
| 31 December 2016 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 | US\$'000 US\$'000 US\$'000 US\$'000 | |||
| Financial assets measured at fair value | ||||||||||
| Investment in listed debt securities | ۰ | ۰ | 6,068 | ۰ | 6,068 | 6.068 | ٠ | $\overline{\phantom{a}}$ | 6,068 | |
| Financial assets not measured at fair value | ||||||||||
| Loans receivable | 15,770 | ٠ | $\overline{\phantom{0}}$ | 15,770 | ||||||
| Trade and other receivables | $\overline{\phantom{a}}$ | 7.649 | $\overline{\phantom{a}}$ | ۰ | $\overline{\phantom{a}}$ | 7,649 | ||||
| Cash and cash equivalents | $\overline{\phantom{0}}$ | $\overline{\phantom{0}}$ | 10,619 | $\overline{\phantom{0}}$ | 10,619 | |||||
| 15,770 | 7.649 | ۰ | 10.619 | 34,038 | ||||||
| Financial liabilities not measured at fair value | ||||||||||
| Interest bearing loans and borrowings | - | ۰ | (627, 822) | (627.822) | $\sim$ | (614, 771) | $\overline{\phantom{a}}$ | (614, 771) | ||
| Trade and other payables | ۰ | $\overline{\phantom{a}}$ | ٠ | ۰ | (17, 728) | (17, 728) | ||||
| ٠ | - | - | (653,098) | (653,098) |
The Group has exposure to the following risks arising from financial instruments:
The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework and is responsible for developing and monitoring the Group's risk management policies.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Audit Committee overseas how management monitors compliance with the Group's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from tenants and investments in debt securities.
The carrying amount of financial assets represents the maximum credit exposure.
Financial assets which are potentially subject to credit risk consist principally of trade and other receivables as well as credit exposures with respect to rental customers and buyers of residential properties including outstanding receivables. The carrying amount of trade and other receivable
represents the maximum amount exposed to credit risk. There is no concentration of credit risk to any single customer in any of the Group's segments. Geographically there is no concentration of credit risk. The Group has policies in place to ensure that sales of flats and parking lots as well as renting of vacant spaces are made to customers and tenants with an appropriate credit history and monitors on a continuous basis the ageing profile of its receivables.
At 31 December 2017, the ageing of trade and other receivable that were not impaired was as follows:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Neither past due nor impaired | 315 | - |
| Past due 1-30 days | 20,460 | 2,193 |
| Past due 31-90 days | 1,078 | 729 |
| Past due 91-120 days | 2,022 | 4,727 |
| Past due 121 days | 1,405 | - |
| 25,280 | 7,649 |
Management believes that the unimpaired amounts that are past due by more than 30 days are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk, including underlying customers' credit ratings if they are available.
The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows:
| Individual | Collective | |
|---|---|---|
| impairments | impairments | |
| US\$ '000 | US\$ '000 | |
| Balance at 1 January 2016 | 12 | 11,390 |
| Reversal of impairment loss recognised | 12 | (1,669) |
| Exchange difference effect | - | (1,460) |
| Balance at 31 December 2016 | 24 | 8,261 |
| Impairment loss/(reversal) recognised | 38 | (8,699) |
| Exchange difference effect | 20 | 438 |
| Balance at 31 December 2017 | 82 | - |
The Group limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations.
The Group held cash at bank of US\$95,102 thousand at 31 December 2017 (2016: US\$10,356). The cash and cash equivalents are held with bank and financial institution counterparties with a high credit rating. The utilisation of credit limits is regularly monitored.
The Group has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries.
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.
The Group's liquidity position is monitored by the management which take necessary actions if required. The Group structures its assets and liabilities in such a way that liquidity risk is minimised.
The Group maintains the following lines of credit as at 31 December 2017:
The following are the remaining contractual maturities of financial liabilities at the reporting date, including estimated interest payments and excluding the impact of netting agreements:
| 31 December 2017 | Carrying | Contractual | 6 6-12 months |
1-2 | 2-5 | |
|---|---|---|---|---|---|---|
| Amount US\$'000 |
Cash flow US\$'000 |
or less US\$'000 |
months US\$'000 |
years US\$'000 |
years US\$'000 |
|
| Secured bank loans | 578,952 | (718,279) | (26,717) | (25,194) | (46,721) | (619,647) |
| Unsecured loans | 307 | (307) | (307) | - | - | - |
| Trade and other payables |
25,230 | (25,230) | (25,230) | - | - | - |
| 31 December 2016 | Carrying | Contractual | 6 months |
6-12 | 1-2 | 2-5 |
|---|---|---|---|---|---|---|
| Amount US\$'000 |
Cash flow US\$'000 |
or less US\$'000 |
months US\$'000 |
years US\$'000 |
years US\$'000 |
|
| Secured bank loans | 627,533 | (683,605) | (23,378) | (23,640) | (636,587) | - |
| Unsecured loans | 289 | (289) | (289) | - | - | - |
| Trade and other payables |
17,728 | (17,728) | (17,728) | - | - | - |
As disclosed in note 26 the Group has secured bank loans that contain loan covenants. A future breach of a covenant may require the Group to repay the loan earlier than indicated in the above table.
Market price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices such as foreign exchange rates, interest rates and equity prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
The Group is exposed to currency risk to the extent that there is a mismatch between the currencies in which loans receivable, sales, purchases of material and construction services and borrowings are denominated and the respective functional currencies of Group companies. The functional currencies of Group companies are primarily the Russian Roubles and US Dollars. The currencies in which these transactions are primarily denominated are Russian Roubles, US Dollars and Euro.
The summary quantitative date about the Group's exposure to currency risk as reported to the management of the Group is as follows:
| 31 December 2017 | RUR | US\$ | EUR |
|---|---|---|---|
| US\$'000 | US\$'000 | US\$'000 | |
| Cash and cash equivalents | 62 | 32,140 | 426 |
| Trade receivables | 161 | 2,613 | 128 |
| Loans and borrowings | (7,082) | (393,209) | - |
| Trade payables | (115) | (6,478) | (270) |
| 31 December 2016 | RUR US\$'000 |
US\$ US\$'000 |
EUR US\$'000 |
|---|---|---|---|
| Cash and cash equivalents | 48 | 3,230 | 156 |
| Loans receivable | - | 11,504 | - |
| Trade receivables | 2,935 | 608 | 33 |
| Loans and borrowings | (6,726) | (468,431) | - |
| Trade payables | (210) | (10,496) | (176) |
The following shows the magnitude of changes in respect of a number of major factors influencing the Group's profit before taxes. The assessment has been made on the year-end figures.
A 10% strengthening of the Russian Rubble, US dollar or Euro against all other currencies at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and affected equity and profit or loss by the amounts shown below.
This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales, purchases of material and construction services. The analysis is performed on the same basis for 2016.
| Profit for the year | Equity | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| 31 December 2017 | ||
| Russian Roubles | 634 | - |
| US dollar | (40,548) | - |
| Euro | 11 | - |
| 31 December 2015 | ||
| Russian Roubles | 626 | - |
| US dollar | (51,509) | - |
| Euro | (12) | - |
A 10% weakening of the Russian Rubble, US dollar or Euro against all other currencies at 31 December 2016 would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group's management monitors the interest rate fluctuations on a continuous basis and acts accordingly.
At the reporting date the interest rate profile of the Group's interest-bearing financial instruments is as follows:
| Carrying amount | |||
|---|---|---|---|
| 2017 | 2016 | ||
| US\$ '000 | US\$ '000 | ||
| Fixed rate instruments | |||
| Financial assets | 95,821 | 29,994 | |
| Financial liabilities | (197,564) | (159,391) | |
| (101,743) | (129,397) | ||
| Variable rate instruments | |||
| Financial assets | - | - | |
| Financial liabilities | (381,695) | (468,431) | |
| (381,695) | (468,431) |
An increase of 100 basis points in interest rates at the reporting date would have increased/ (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2016.
| Profit for | ||
|---|---|---|
| Equity | the year | |
| US\$ '000 | US\$ '000 | |
| 31 December 2017 | ||
| Variable rate instruments | - | (3,817) |
| 31 December 2016 | ||
| Variable rate instruments | - | (4,684) |
A decrease of 100 basis points in interest rates at the reporting date would have the equal but opposite effect on the above instruments to the amounts shown above, on the basis that all other variables remain constant.
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.
The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas:
requirements for appropriate segregation of duties, including the independent authorisation of transactions
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Group.
The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
There were no changes in the Group's approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
The Company is committed to delivering the highest standards in boardroom practice and financial transparency through:
A full programme of investor relations activity ensures appropriate contact with institutional and private shareholders, with regular meetings, presentations and disclosure of important information. Great care is taken to provide suitably detailed information on the Group's activities and results to enable various stakeholders to understand the performance and prospects of the Group.
The Group's operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.
The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and
others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
The consolidated financial statements reflect management's assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management's assessment.
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities.
Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year generally remains open for review by the tax authorities during the three subsequent calendar years. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation.
Transfer pricing legislation enacted in the Russian Federation starting from 1 January 2012 provides for major modifications making local transfer pricing rules closer to OECD guidelines, but creating additional uncertainty in practical application of tax legislation in certain circumstances.
These transfer pricing rules provide for an obligation for the taxpayers to prepare transfer pricing documentation with respect to controlled transactions and prescribe the basis and mechanisms for accruing additional taxes and interest in case prices in the controlled transactions differ from the market level.
The transfer pricing rules apply to cross-border transactions between related parties, as well as to certain cross-border transactions between independent parties, as determined under the Russian Tax Code (no threshold is set for the purposes of prices control in such transactions). In addition, the rules apply to in-country transactions between related parties if the accumulated annual volume of the transactions between the same parties exceeds a particular threshold (RUB 1 billion in 2014 and thereon).
The compliance of prices with the arm's length level could be as well subject to scrutiny on the basis of unjustified tax benefit concept.
In addition, a number of new laws introducing changes to the Russian tax legislation have been recently adopted. In particular, starting from 1 January 2015 changes aimed at regulating tax consequences of transactions with foreign companies and their activities were introduced, such as concept of beneficial ownership of income, taxation of controlled foreign companies, tax residency rules, etc. These changes may potentially impact the Group's tax position and create additional tax risks going forward. This legislation and practice of its application is still evolving and the impact of legislative changes should be considered based on the actual circumstances.
All these circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the tax authorities and courts, especially due to reform of the supreme courts that are resolving tax disputes, could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.
| Name: | Country: | |
|---|---|---|
| Ultimate controlling party: | Lev Leviev | Israel |
| Holding company: | Flotonic Limited (see note below) | Cyprus |
| Significant Subsidiaries | Ownership interest % | Country of incorporation |
||
|---|---|---|---|---|
| 2017 | 2016 | |||
| 1. | OOO AFI RUS | 100 | 100 | Russian Federation |
| 2. | OOO Avtostoyanka Tverskaya Zastava | 100 | 100 | Russian Federation |
| 3. | OOO Krown Investments | 100 | 100 | Russian Federation |
| 4. 5. 6. |
OAO Moskovskiy Kartonazhno-poligra phicheskiy Kombinat (MKPK) Bellgate Constructions Limited OOO Regionalnoe AgroProizvodstvennoe |
99.18 100 |
99.17 100 |
Russian Federation Cyprus |
| 7. 8. |
Objedinenie (RAPO) Scotson Limited OOO Titon |
100 100 100 |
100 100 100 |
Russian Federation Cyprus Russian Federation |
| 9. ZAO MTOK | 99.71 | 99.71 | Russian Federation | |
| 10. Triumvirate I S.a r.I | 100 | 100 | Russian Federation | |
| 11. OOO Nordservice | 100 | 100 | Russian Federation | |
| 12. OOO Plaza SPA | 100 | 100 | Russian Federation | |
| 13. OOO Semprex | 100 | 100 | Russian Federation | |
| 14. OOO Zheldoruslugi | 100 | 95 | Russian Federation | |
| 15. OOO Bizar | 100 | 74 | Russian Federation | |
| 16. AFI D Finance SA | 100 | 100 | British Virgin Islands |
Flotonic Limited, a fully owned private company of Mr Leviev, holds 336,948,796 Global Depository Receipts (issued over "A" ordinary shares) and 342,799,658 Depository Interests (issued over "B" ordinary shares), representing in aggregate 64.88% of the Company's issued share capital.
Additionally, Mr Leviev has personally granted a call option to Africa Israel Investments Ltd ("AI"), previous holding company, in respect of 51,933,807 GDRs and 52,835,598 B ordinary shares (approximately 10% of the Company's issued share capital) at a price of US\$0.216 per 1 GDR and US\$0.295 per 1 "B" ordinary share. The call option has been assigned by AI to trustees on behalf of AI bondholders and the trustees may exercise the Call Option within three years from the date of completion of the Purchase Transaction upon instructions of the AI bondholders.
On 28 February 2017, the Group acquired the additional 50% of the "Plaza Spa Kislovodsk" project by acquiring the shares and voting rights of Nouana Limited, Craespon Management Limited, Emvial Limited and Sanatoriy Plaza LLC. As a result, the Group's equity interest in the above mentioned entities increased from 50% to 100%, obtaining their control. Principal activity of Nouana Limited, Craespon Management Limited and Emvial Limited is that of holding of investments while Sanatoriy Plaza LLC is the owner of "Plaza Spa Kislovodsk" project. The Project is an operating spa resort hotel in the Caucasian mineral waters region, in the town of Kislovodsk. It has 275 guest rooms and a gross buildable area of 25,000 sq.m.
This acquisition enables the Group to consolidate 100% of the Project, manage it at its sole discretion and consolidate 100% of its revenues. Revenue attributed to the acquired 50% stake, based on the 2016 annual results, was US\$9 million. The gross profit attributed to the acquired 50% stake in the Project, based on the 2016 annual results, was US\$4.4 million.
The Group paid an amount of US\$5,632 thousand for the acquisition itself of the 50% equity stakes in the previously held joint ventures. In order to finance the acquisition the Group has received a loan of US\$22,500 thousand, from VTB Bank PJSC. The remainder of the loan was used to repay the outstanding debt of Sanatoriy Plaza LLC to the joint venture partner in the project, in the amount of US\$16,868 thousand, prior to the acquisition of the equity stakes.
| US\$ '000 | |
|---|---|
| Cash | 5,632 |
| Cash and cash equivalents acquired (note b) | (4,846) |
| Net consideration | 786 |
The following table summarises the recognised amounts of assets and liabilities assumed at the date of acquisition:
| US\$ '000 | |
|---|---|
| Property, plant and equipment | 45,580 |
| VAT recoverable | 33 |
| Inventory | 392 |
| Trade and other receivables | 307 |
| Cash and cash equivalents | 4,846 |
| Loans and borrowings | (16,868) |
| Deferred tax liabilities | (8,807) |
| Trade and other payables | (1,675) |
| Total identifiable net assets acquired | 23,808 |
Goodwill arising from the acquisition has been recognised as follows:
| US\$ '000 | |
|---|---|
| Consideration transferred (note a) | 5,632 |
| Fair value of existing interest in joint ventures | 20,903 |
| Fair value of identifiable net assets (note b) | (23,808) |
| Goodwill | 2,727 |
| Impairment | (2,727) |
| - |
At acquisition the gain on the Group's previously held 50% interest in the joint venture was US\$10,259 thousand, which comprised US\$7,803 thousand fair value gain on net assets less the US\$1,815 thousand carrying amount of the equity accounted investee at the date of acquisition plus US\$4,271 thousand of translation reserve reclassified to profit or loss. The gain is presented net of impairment of goodwill of US\$2,727 which was the result of the 100% acquisition. The Board of Directors has decided to impair the resulting goodwill to zero considering the amount paid above the fair value of the net assets acquired, represents a premium paid to acquire control of the entity which was over and above its market value.
During the period, the Group acquired an additional 5% interest in Beslaville Management Limited and its Russian subsidiary Zheldoruslugi LLC, increasing its ownership from 95% to 100% and 26% interest in Bizar LLC increasing its ownership from 74% to 100%. The carrying amount of Beslaville Management Limited's together with its subsidiary and Bizar's net assets in the Group's financial statements on the date of acquisition was negative (US\$60,660) thousand and (US\$1,496) thousand respectively.
The following table summarises the effect of changes in the Company's ownership interest in Beslaville Management Limited, Zheldoruslugi LLC and Bizar LLC.
| US\$ '000 | |
|---|---|
| Carrying amount of NCI acquired ((\$60,660) thousand * 5% & (\$1,496) thousand * 26%) |
(3,422) |
| Consideration paid to NCI | (6,710) |
| A decrease in equity attributable to owners of the Company | (10,132) |
The decrease in equity attributable to owners of the Company comprised of a negative capital reserve of US\$10,132 thousand.
Non-cancellable operating lease rentals are payable as follows:
| 2017 | 2016 | ||
|---|---|---|---|
| US\$ '000 | US\$ '000 | ||
| Less than a year Between one and five years |
6,165 13,688 |
6,017 17,613 |
|
| More than five years | 45,716 | 27,042 | |
| 65,569 | 50,672 | ||
| Amount recognised as an expense during the year | 1,897 | 1,429 |
The ownership of land in the Russian Federation is rare and especially within Moscow region, in which all of the property with only a few exceptions, is owned by the City of Moscow. The majority of land is occupied by private entities pursuant to lease agreements between occupants, of the building located on the land, and the City of Moscow. The Group has several long-term operating leases for land. These leases are entered into with the intention and right to develop the land and carry out construction. Typically they run for an initial period of one to five years which is the period of development and upon completion of development the developer has the right to renew for a long term period of usually up to 49 years. Under both leases the lessee is required to make periodic lease payments, generally on a quarterly basis to the City of Moscow.
There is also the option of long term land lease prior to commencement of construction which the developer can acquire with a lump sum payment that is determined from time to time by the City of Moscow and is based on the size of the land, its location and the proximity to amenities. The Group has five such land rights and they run for period of 49 years.
The Group leases out investment property under operating leases, see note 15. The future minimum lease payments under non-cancellable leases are as follows:
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Less than a year | 75,827 | 68,426 |
| Between one and five years | 181,910 | 134,456 |
| More than five years | 48,500 | 29,301 |
| 306,237 | 232,183 | |
| Amount recognised as income during the year | 87,852 | 72,299 |
Up to 31 December 2017 the Group has entered into a number of contracts for the construction of investment or trading properties:
| Project name | Commitment | ||||
|---|---|---|---|---|---|
| 2017 | 2016 | ||||
| US\$ '000 | US\$ '000 | ||||
| Odinburg | 51,724 | 2,158 | |||
| Kossinskaya | 337 | 839 | |||
| TVZ Plaza IC | 116 | 1,122 | |||
| Serebryakova | 104,625 | 21,856 | |||
| Pavaletskaya II | 10,180 | 28,196 | |||
| TVZ Plaza IV | 624 | 24 | |||
| TVZ Plaza II | 343 | 761 | |||
| Bolshaya Pochtovaya | 52,908 | 115 | |||
| Starokaluzhskoye shosse | 27 | 5 | |||
| 220,884 | 55,076 |
Outstanding balances with related parties:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Assets | ||
| Amounts receivable from joint ventures | - | 11 |
| Amounts receivable from other related companies | 109 | 256 |
| Long term loans receivable from joint ventures | - | 15,745 |
| Liabilities | ||
| Amounts payable to joint ventures | - | 102 |
| Amounts payable to other related companies | 183 | 325 |
| Deferred income from related company | 101 | 145 |
Transactions with the key management personnel:
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Key management personnel compensation comprised: | ||
| Short-term employee benefits | 2,662 | 2,631 |
| Share option scheme expense | - | 857 |
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The person is a member of the key management personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key management is not limited to directors; other members of the management team also may be key management.
Other related party transactions:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Revenue | ||
| Joint venture – consulting services | 31 | 173 |
| Joint venture – interest income | 211 | 1,339 |
| Related company – other income | 1 | - |
| Related company – rental income | 408 | 699 |
| Expenses | ||
| Related company – administrative expenses | - | 157 |
| Joint venture – operating expenses | 10 | 54 |
| Construction services capitalised | ||
| Related company – construction services | - | - |
Subsequent to 31 December 2017 there were no events that took place which have a bearing on the understanding of these financial statements except of the following:
We, the members of the Board of Directors and the Company officials responsible for the drafting of the separate financial statements of AFI Development Plc (the 'Company') for the year ended 31 December 2017, the names of which are listed below, confirm that, to the best of our knowledge:
d) The separate financial statements on pages 128 to 148:
(iii) have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union and the requirements of the Cyprus Companies Law,
(iv) give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidated financial statements taken as a whole,
e) the adoption of a going concern basis for the preparation of the separate financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Company; and
The Directors of the Company as at the date of this announcement are as set out below:
Executive directors
Non-executive independent directors
| Panayiotis Demetriou | |
|---|---|
| David Tahan |
Chief executive officer
| Mark Groysman | |
|---|---|
| --------------- | -- |
Chief financial officer
| Natalia Pirogova |
|---|
| ------------------ |
16 April 2018
For the year ended 31 December 2017
| 2017 | 2016 | ||
|---|---|---|---|
| Note | US\$ '000 | US\$ '000 | |
| Revenue | 4 | 17,347 | 478,382 |
| Other income | - | 482 | |
| Other expenses | (31) | (82) | |
| Administrative expenses | 5 | (4,505) | (6,912) |
| Impairment of investment in subsidiaries | 7 | (899,156) | (560,663) |
| (903,682) | (567,657) | ||
| Results from operating activities | (886,345) | (88,793) | |
| Finance income | - | 254 | |
| Finance costs | (5,957) | (8,777) | |
| Net finance costs | 6 | (5,957) | (8,523) |
| Loss for the year | (892,302) | (97,316) | |
| Other comprehensive income | - | - | |
| Total comprehensive expense for the year | (892,302) | (97,316) |
For the year ended 31 December 2017
| Share capital US\$ '000 |
Share premium US\$ '000 |
Accumula ted losses US\$ '000 |
Total US\$ '000 |
|
|---|---|---|---|---|
| Balance at 1 January 2016 | 1,048 | 1,763,409 | (419,452) | 1,345,005 |
| Total comprehensive income for the year Transactions with owners of the Company Contributions and distributions |
- | - | (97,316) | (97,316) |
| Share option expense | - | - | 857 | 857 |
| Balance at 31 December 2016 | 1,048 | 1,763,409 | (515,911) | 1,248,546 |
| Balance at 1 January 2017 | 1,048 | 1,763,409 | (515,911) | 1,248,546 |
| Total comprehensive income for the year | - | - | (892,302) | (892,302) |
| Balance at 31 December 2017 | 1,048 | 1,763,409 | (1,408,213) | 356,244 |
As at 31 December 2017
| Note | 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|---|
| Assets | |||
| Investment in subsidiaries | 7 | 371,778 | 1,242,182 |
| Trade and other receivables | 8 | 8,433 | 210,947 |
| Refundable tax | 2,215 | 2,215 | |
| Cash and cash equivalents | 9 | 897 | 2,057 |
| Total current assets | 11,545 | 215,219 | |
| Total assets | 383,323 | 1,457,401 | |
| Equity | |||
| Share capital | 1,048 | 1,048 | |
| Share premium | 1,763,409 | 1,763,409 | |
| Accumulated losses | (1,408,213) | (515,911) | |
| Total equity | 10 | 356,244 | 1,248,546 |
| Liabilities | |||
| Loans and borrowings | 11 | 22,182 | 109,337 |
| Total non-current liabilities | 22,182 | 109,337 | |
| Trade and other payables | 12 | 4,897 | 99,518 |
| Total current liabilities | 4,897 | 99,518 | |
| Total liabilities | 27,079 | 208,855 | |
| Total equity and liabilities | 383,323 | 1,457,401 |
The financial statements were approved by the Board of Directors on 16 April 2018.
Lev Leviev Chairman
David Tahan Director
For the year ended 31 December 2017
| Note | 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|---|
| Cash flows from operating activities Loss for the year |
(892,302) | (97,316) | |
| Adjustments for: Net foreign exchange loss/(gain) Impairment of investment in subsidiaries Dividend income Interest income Interest expense Share option expense |
6 7 4 6 6 5 |
16 899,156 (17,347) - 5,924 - |
(46) 560,663 (478,382) (208) 8,756 857 |
| Change in trade and other receivables Change in trade and other payables Net cash used in operating activities |
(4,553) 564 518 (3,471) |
(5,676) (448) 554 (5,570) |
|
| Cash flows from investing activities Additional contribution of capital to existing subsidiaries Additional shareholding in subsidiary Proceeds from repayment of loans receivable Proceeds from disposal of investments in subsidiaries Interest received Net cash used in investing activities |
7 7 4 6 |
(33,906) (1,500) - 24,001 - (11,405) |
(3,001) - 3,300 - 235 534 |
| Cash flows from financing activities Repayment of loans and borrowings Proceeds from loans and borrowings Net cash from/(used in) financing activities |
11 11 |
- 13,735 13,735 |
(6,050) 6,225 175 |
| Effect of exchange rate fluctuations on cash held | (19) | 13 | |
| Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December |
9 | (1,160) 2,057 897 |
(4,848) 6,905 2,057 |
| The cash and cash equivalents consists of: Cash at banks |
897 | 2,057 |
For the year ended 31 December 2017
AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 165 Spyrou Araouzou Street, Lordos Waterfront Building, 5th floor, Flat/office 505, 3035 Limassol, Cyprus. As of 7 September 2016 the Company is a 64.88% subsidiary of Flotonic Limited, a private holding company registered in Cyprus, 100% owned by Mr Lev Leviev. The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue, 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.
The principal activity of the Company is the holding of investments in subsidiaries.
The financial statements have been prepared on a going concern basis, as detailed in note 2(i) of the consolidated financial statements.
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.113.
Users of these parent's separate financial statements should read them together with the Group's consolidated financial statements as at and for the year ended 31 December 2017 in order to obtain a proper understanding of the financial position, the financial performance and the cash flows of the Company and the Group.
The financial statements have been prepared under the historical cost convention, except in the case of investments, which are stated at cost less provision for impairment in value and receivables which are stated after the provision for impairment.
As from 1 January 2017, the Company adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations. This adoption did not have a material effect on the parent's separate financial statements except for the adoption of IFRS 9 "financial instruments".
The following Standards, Amendments to Standards and Interpretations have been issued by International Accounting Standards Board ("IASB") but are not yet effective for annual periods
beginning on 1 January 2017. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these Standards early.
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programs. It provides a principles-based approach for revenue recognition, and introduces the concept of recognizing revenue for performance obligations as they are satisfied. The recognition of such revenue is in accordance with five steps to: 1) identifying the contract with the customer; 2) identifying each of the performance obligations included in the contract; 3) determining the transaction price; 4) allocating the transaction price to the performance obligations in the contract; and 5) recognising revenue as each performance obligation is satisfied.
Based on assessments undertaken to date, the adoption of the standard is not expected to have a material impact on the Company's financial statements.
IFRS 15 (Clarifications) "Revenue from Contracts with Customers" (effective for annual periods beginning on or after 1 January 2018).
Clarifications to IFRS 15 provide additional application guidance but do not change the underlying principles of the standard. The clarifications relate principally to identifying performance obligations (step 2), accounting for licenses of intellectual property (step 5) and agent vs principal considerations. The clarifications also introduce additional practical expedients on transition in relation to modified and completed contracts.
Based on assessments undertaken to date, the adoption of the clarifications is not expected to have a material impact on the Company's financial statements.
IFRS 9 (Amendments) "Prepayment Features with Negative Compensation" (effective for annual periods beginning on or after 1 January 2019) In October 2017, the IASB issued "Prepayment Features with Negative Compensation (Amendments to IFRS 9)". The amendments address the issue that under pre-amended IFRS 9, financial assets with such features would probably not meet the SPPI criterion and as such would be measured at fair value through profit or loss. The IASB believes that this would not be appropriate because measuring them at amortised cost provides useful information about the amount, timing and uncertainty of their future cash flows. Financial assets with these prepayment features can therefore be measured at amortised cost or fair value through other comprehensive income provided that they meet the other relevant requirements of IFRS 9. The final amendments also contain a clarification in the accounting for a modification or exchange of a financial liability measured at amortised cost that does not result in thederecognition of the financial liability. Based on the clarification, an entity recognises any adjustment to the amortised cost of the financial liability arising from a modification or exchange in profit or loss at the date of the modification or exchange.
The Company is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the amendments is not yet known or reasonably estimable.
IFRIC 23 "Uncertainty over Income Tax Treatments" (effective for annual periods beginning on or after 1 January 2019).
IFRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency. The key test is whether it is probable that the tax authority will accept the chosen tax treatment, on the assumption that tax authorities will have full knowledge of all relevant information in assessing a proposed tax treatment. The uncertainty is reflected using the measure that provides the better prediction of the resolution of the uncertainty being either the most likely amount or the expected value. The interpretation also requires companies to reassess the judgements and estimates applied if facts and circumstances change. IFRIC 23 does not introduce any new disclosures but reinforces the need to comply with existing disclosure requirements in relation to judgements made, assumptions and estimates used, and the potential impact of uncertainties that are not reflected.
The Company is currently evaluating the expected impact of adopting the interpretation on its financial statements. As such, the expected impact of the interpretation is not yet known or reasonably estimable
"Amendments to References to the Conceptual Framework in IFRS Standards" (effective for annual periods beginning on or after 1 January 2020)
In March 2018 the IASB issued a comprehensive set of concepts for financial reporting, the revised "Conceptual Framework for Financial Reporting" (Conceptual Framework), replacing the previous version issued in 2010. The main changes to the framework's principles have implications for how and when assets and liabilities are recognised and derecognized in the financial statements, while some of the concepts in the revised Framework are entirely new (such as the "practical ability" approach to liabilities". To assist companies with the transition, the IASB issued a separate accompanying document "Amendments to References to the Conceptual Framework in IFRS Standards". This document updates some references to previous versions of the Conceptual Framework in IFRS Standards, their accompanying documents and IFRS Practice Statements.
The Company is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the amendments is not yet known or reasonably estimable
The following standard is expected to have a material impact on the Company's financial statements in the period of initial application.
The Company is required to adopt IFRS 9 Financial Instruments from 1 January 2018. The Company has assessed the estimated impact that the initial application of IFRS 9 will have on its separate financial statements. The estimated impact of the adoption of this standard on the Company's equity as at 1 January 2018 is based on assessments undertaken to date and is summarised below. The actual impact of adopting the standard at 1 January 2018 may change because:
| In thousands of dollars |
As reported at 31 December 2017 US\$ '000 |
Estimated adjustments due to adoption of IFRS 9 US\$ '000 |
Estimated adjusted opening balance at 1 January 2018 US\$ '000 |
|---|---|---|---|
| Accumulated losses | (1,408,213) | (7,840) | (1,416,053) |
IFRS 9 Financial Instruments sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.
maturity, loans and receivables and available for sale.
Based on its assessment, the Company believes that the new classification requirements will not have a material impact on its accounting for cash and cash equivalents and trade and other receivables.
IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking 'expected credit loss' (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probabilityweighted basis. The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets.
Under IFRS 9, loss allowances will be measured on either of the following bases:
– 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and – lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.
The Company believes that impairment losses are likely to increase and become more volatile for assets in the scope of the IFRS 9 impairment model. Based on the impairment methodology described below, the Company has estimated that application of IFRS 9's impairment requirements at 1 January 2018 results in additional impairment losses as follows.
| Estimated additional | |
|---|---|
| impairment | |
| recognised at 1 | |
| January 2018 | |
| In thousands of dollars | US\$ '000 |
| Trade and other receivables | 8,030 |
| Cash and cash equivalents | 1 |
| Gross additional impairment losses | 8,031 |
The estimated ECLs for trade and other receivables were calculated based on actual credit loss experience over the prior years.
The cash and cash equivalents are held with bank and financial institution counterparties as at 31 December 2017. The estimated impairment on cash and cash equivalents was calculated based on the 12-month expected loss basis and reflects the short maturities of the exposures. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under IFRS 9 these fair value changes are generally presented as follows:
– The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and
– The remaining amount of change in the fair value is presented in profit or loss.
The Company has not designated any financial liabilities at FVTPL and it has no current intention to do so.
(iv) Transition
Changes in accounting policies resulting from the adoption of IFRS 9 will generally be applied retrospectively, except as described below.
The Company will take advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 will generally be recognised in retained earnings and reserves as at 1 January 2018.
The following assessments have to be made on the basis of the facts and circumstances that exist at the date of initial application.
– The determination of the business model within which a financial asset is held.
The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may deviate from such estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
In particular, information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described below:
Income taxes
Significant judgement is required in determining the provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax provisions in the period in which such determination is made.
Impairment of investments in subsidiaries
The Company periodically evaluates the recoverability of investments in subsidiaries whenever indicators of impairment are present. Indicators of impairment include such items as declines in revenues, earnings or cash flows or material adverse changes in the economic or political stability of a particular country, which may indicate that the carrying amount of an asset is not recoverable. If facts and circumstances indicate that investment in subsidiaries may be impaired, the estimated future undiscounted cash flows associated with these subsidiaries would be compared to their carrying amounts to determine if a write-down to fair value is necessary.
These financial statements are presented in United States Dollars, which is the Company's functional currency. All financial information presented in United States Dollars has been rounded to the nearest thousand, except when otherwise indicated.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in stating the financial position of the Company.
Investments in subsidiary companies are stated at cost less provision for impairment in value, which is recognised as an expense in the period in which the impairment is identified.
Finance income comprises interest income on bank deposits. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Finance costs comprise interest expense on borrowings. Borrowing costs are recognised in profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.
Functional and presentation currency
Items included in the Company's financial statements are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The financial statements are presented in United States Dollars, rounded to the nearest thousand, which is the Company's functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
Dividend income is recognised in profit or loss when the right to receive payment is established i.e. dividends are declared and approved by the investee companies.
Tax liabilities and assets for the current and prior periods are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and laws that have been enacted, or substantively enacted, by the reporting date. Current tax includes any adjustments to tax payable in respect of previous periods.
Dividend distribution to the Company's shareholders is recognised in the Company's financial statements in the year in which they are approved by the Company's shareholders.
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank.
Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method.
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position.
Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are presented separately in the statement of financial position and are to be measured at the lower of the asset's previous carrying amount and fair value less costs to sell.
Ordinary shares are classified as equity. The difference between the fair value of the consideration received by the Company and the nominal value of the share capital being issued is taken to the share premium account.
Non current liabilities represent amounts that are due more than twelve months from the reporting date.
Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year.
| 2017 | 2016 |
|---|---|
| US\$ '000 | US\$ '000 |
| Dividend income 17,347 |
478,382 |
During the current year, the Company transferred its investment in subsidiary Severus Trading Limited to another subsidiary, Kentoralia Limited for a total consideration of US\$24,000 thousand. Being a common control transaction the difference between the cost of investment and the disposal price was recognised as a deemed dividend received.
During the year 2016, the Company transferred its investment in subsidiary Bellgate Constructions Limited to another subsidiary, Vardia Limited for a total consideration of US\$500,000 thousand. Being a common control transaction the difference between the cost of investment and the disposal price was recognised as a deemed dividend received.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Consultancy and brokerage fees | 193 | 1,723 |
| Donations | - | 640 |
| Legal fees | 1,118 | 623 |
| Share option expense | - | 857 |
| Directors' remuneration | 1,334 | 1,361 |
| Auditors' remuneration | 559 | 320 |
| Valuation expenses | 52 | 91 |
| Insurance | 106 | 168 |
| Other administrative expenses | 1,143 | 1,129 |
| 4,505 | 6,912 |
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Interest income Net foreign exchange gain Finance income |
- - - |
208 46 254 |
| Interest expense on loans and borrowings Other finance costs Net foreign exchange loss |
(5,924) (17) (16) |
(8,756) (21) - |
| Finance costs | (5,957) | (8,777) |
| Net finance costs | (5,957) | (8,523) |
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Balance at 1 January | 1,242,182 | 1,313,453 |
| Additional investment in existing subsidiaries | 35,406 | 511,010 |
| Disposal of investment in subsidiaries | (6,654) | (21,618) |
| Impairment | (899,156) | (560,663) |
| Balance at 31 December | 371,778 | 1,242,182 |
During the current year, the Company acquire, the remaining 5% shareholding in its subsidiary Beslaville Management Ltd for a total consideration of US\$1,500 thousand.
In addition, during the current year, the Company made capital contributions for a total amount of US\$23.134 thousand to its Russian subsidiaries Krown Investment LLC and Tverskaya Zastava LLC and increase its investment in Cypriot subsidiary Doralo Ltd with the issuance of 9,100 ordinary shares for a nominal value of €1 and share premium of €999 per share.
During the current year, the Company transferred its 100% holding in its subsidiary Severus Trading Ltd to its subsidiary Kentoralia Ltd for a total consideration of US\$24,000 thousand. Being a common control transaction the difference of US\$17,347 thousand between the cost of investment and the disposal price was recognised as a deemed dividend received in profit or loss.
During the year 2016, based on an internal restructuring plan, the Company transferred its 100% holding in its subsidiary Bellgate Constructions Limited to subsidiary Vardia Limited for a total consideration of US\$500,000 thousand. Being a common control transaction the difference of US\$478,382 thousand between the cost of investment and the disposal price was recognised as a deemed dividend received in profit or loss. Following this internal restructuring plan, the Company contributed on 30 December 2016 the amount of US\$500,000 thousand to its subsidiary AFI D Finance S.A, which was previously received as deemed dividend.
At 31 December 2017 the Company recognised an impairment loss of US\$899,156 thousand (31/12/2016: US\$560,663 thousand) due to a decrease in the fair value of the properties held by its subsidiaries as at that date, the deemed dividend received and an estimate of impairment of
the loan receivables of AFI D Finance S.A. in which the Company impaired its investment. Refer to the Russian Business Environment section in this note for further details of the unfavourable conditions which contributed to the drop in fair value of the subsidiaries' projects.
The details of the subsidiaries are as follows:
| Investment | Country of incorporation |
Principal activities |
2017 US\$ '000 |
2016 US\$ '000 |
|---|---|---|---|---|
| Investment in holding companies |
Cyprus | Holding of investments/Financing |
211,225 | 218,979 |
| Investment in real estate companies |
Russian Federation |
Real estate development |
159,995 | 215,569 |
| Investment in financing companies |
BVI | Financing | 558 | 807,634 |
| 371,778 | 1,242,182 |
The exposure to the Russian Business Environment in relation to the investment in real estate investment and development entities in Russia is presented in note 14 of these financial statements.
| 2017 US\$ '000 |
2016 US\$ '000 |
|
|---|---|---|
| Receivables from related parties (Note 13) Other receivables |
8,344 89 8,433 |
210,378 569 210,947 |
During the current year, the receivable balance from related party AFI D Finance S.A. for US\$201,953 thousand was fully settled by way of offset with the whole trade payable amount of US\$95,139 thousand, refer to note 12, and part of the loan payable to AFI D Finance S.A for US\$106,814 thousand, refer to note 11.
The exposure of the Company to credit risk and impairment losses in relation to trade and other receivables is reported in note 14 of the financial statements.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Cash and cash equivalents consists of: | ||
| Cash at banks | 897 | 2,057 |
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Share capital | ||
| Authorised | ||
| 2,000,000,000 shares of US\$0.001 each | 2,000 | 2,000 |
| Issued and fully paid | ||
| 523,847,027 A ordinary shares of US\$0.001 each | 524 | 524 |
| 523,847,027 B ordinary shares of US\$0.001 each | 524 | 524 |
| 1,048 | 1,048 |
Flotonic Limited, a fully owned private company of Mr Leviev, holds 336,948,796 Global Depository Receipts (issued over "A" ordinary shares) and 342,799,658 Depository Interests (issued over "B" ordinary shares), representing in aggregate 64.88% of the Company's issued share capital.
Additionally, Mr Leviev has personally granted a call option to Africa Israel Investments Ltd ("AI"), previous holding company, in respect of 51,933,807 GDRs and 52,835,598 B ordinary shares (approximately 10% of the Company's issued share capital) at a price of US\$0.216 per 1 GDR and US\$0.295 per 1 "B" ordinary share. The call option has been assigned by AI to trustees on behalf of AI bondholders and the trustees may exercise the Call Option within three years from the date of completion of the Purchase Transaction upon instructions of the AI bondholders.
It represents the share premium on the issue of shares on 31 December 2006 for the conversion of the shareholders' loans to capital US\$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US\$14, and the nominal value of the shares, US\$0.001, after deduction of all listing expenses. An amount of US\$1,399,900 thousand less US\$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US\$524 thousand was capitalised as a result of a bonus issue.
The Company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will be required for the grant of the options. In any 10 year period not more than 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan.
If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with the consent of the participant) an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs.
Following the lapse of the ten years period all options have vested during the year 2016 and expired during the year 2017.
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Long term liabilities | ||
| Loans from AFID Finance SA (Note 13) | 22,182 | 109,337 |
| Maturity of non-current borrowings: | ||
| Within one year | - | - |
| Between one and five years | 22,182 | 109,337 |
| 22,182 | 109,337 |
During the current year, the Company's subsidiary, AFI D Finance S.A., granted an additional tranche of US\$13,735 thousand and the Company settled part of the existing loan payable amounting to US\$106,814 thousand by way of offset with its receivable balance from AFI D Finance S.A., refer to note 8.
The loan outstanding on 31 December 2017 represents the unsecured loan from AFI D Finance S.A. The loan bears interest of 6% per annum and is repayable on 31 December 2021.
The exposure of the Company to interest rate risk in relation to financial instruments is reported in note 14 of the financial statements.
| 2017 | 2016 |
|---|---|
| US\$ '000 | US\$ '000 |
| Payables to related parties (Note 13) 4,428 |
99,316 |
| Other payables 469 |
202 |
| 4,897 | 99,518 |
Payables to related parties included an obligation of US\$95,139 thousand to AFI D Finance S.A. arising from an assignment agreement according to which AFID Finance S.A. assigned to the Company a loan receivable from Bellgate Constructions Limited which was later set off with a loan payable to Krown Investments LLC. During the year, the full amount of US\$95,139 thousand was set off with the trade receivable balance from AFI D Finance S.A, refer to note 8.
The transactions with related parties are as follows:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Key management personnel compensation comprised: | ||
| Short-term employee benefits | 1,200 | 1,200 |
| Share option scheme expense | - | 857 |
| (ii) Other related party transactions | ||
| 2017 | 2016 | |
| US\$ '000 | US\$ '000 | |
| Interest expense charged from subsidiaries | (5,924) | (8,756) |
| Consulting fees charged by related company | - | (157) |
| Management fees charged from subsidiaries | (773) | (769) |
| Other administrative expenses charged by related company | (32) | (11) |
| The balances with related parties are as follows: | ||
| (iii) Receivables from related parties (Note 8) | ||
| 2016 | 2015 | |
| US\$ '000 | US\$ '000 | |
| Receivables from subsidiaries | 8,344 | 210,378 |
The balances with related parties are as follows:
| 2017 | 2016 | |
|---|---|---|
| US\$ '000 | US\$ '000 | |
| Payables to subsidiaries | 4,096 | 98,984 |
| Payables to related company | 332 | 332 |
| 4,428 | 99,316 |
| Name | 2017 US\$ '000 |
2016 US\$ '000 |
|---|---|---|
| AFI D Finance S.A. | 22,182 | 109,337 |
The Company is exposed to the following risks from its use of financial instruments:
The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework.
The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities.
Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The Company has no significant concentration of credit risk. Cash balances are held with high credit quality financial institutions and the Company has policies to limit the amount of credit exposure to any financial institution.
The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified.
Credit risk arises from cash and cash equivalents. Cash transactions are limited to high-creditquality financial institutions. The utilisation of credit limits is regularly monitored.
The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries. In negotiations with lending banks, the Company aims to avoid recourse to AFI Development on loans taken by subsidiaries.
As at 31 December 2017, there were three outstanding guarantees: one for the amount of US\$1 million in favour of VTB Bank PJSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City), the second for the amount of US\$ 83,1 million in favour of VTB Bank PJSC, under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III) and the third for the amount up to the book value of the loans which equals US\$ 51,1 million also in favour of VTB Bank PJSC, under a loan facility agreements of Sanatorium Plaza LLC and Sanatorium PlazaSPA LLC.
In January 2018, AFI Development provided an additional guarantee in favour of VTB Bank PJSC for the loan amounting to US\$12.2 million, taken by its subsidiary OJSC MKPK to refinance the incurred construction costs. In Q1 2018 guarantees of AFI Development under a loan facility
agreement of Bellgate Construction Limited (AFIMALL City) and under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III) were terminated due to repayment of debt under loan facility agreements.
Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Company has procedures with the object of minimising such losses such as maintaining sufficient cash and other highly liquid current assets and by having available an adequate amount of committed credit facilities.
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments.
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company's management monitors the interest rate fluctuations on a continuous basis and acts accordingly.
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's measurement currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Euro and the Russian Rouble. The Company's management monitors the exchange rate fluctuations on a continuous basis and acts accordingly.
The Company manages its capital to ensure that it will be able to continue as a going concern while increasing the return to shareholders through the strive to improve the debt equity ratio. The Company's overall strategy remains unchanged from last year.
The real estate projects of the Company's subsidiaries are primarily located in the Russian Federation. Consequently, the Company is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.
The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant
tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine.
Continuation of the above-mentioned events, and/or an increase in the severity thereof, could have an adverse effect on various facets of the Company's subsidiaries' activities and/or data appearing in the financial statements, among others, as follows:
The Company is monitoring the economic developments in Russia, in general, and in the real estate market, in particular. It is noted that due to the uncertainty prevailing in light of the events described above, the Company is reviewing the development plans and timetables of a number of its projects. Due to the inability to predict the duration or the manner of the future development of political and economic events, the Company is not able, at this stage, to estimate the future impact of these matters on its Russian subsidiaries.
The fair values of the Company's financial assets and liabilities approximate their carrying amounts at the reporting date.
We have audited the accompanying financial statements of AFI Development Plc ("the Company") and its subsidiaries (the "Group"), and the separate financial statements of AFI Development Plc (the "Company"), which comprise the consolidated statement of financial position and the statement of financial position of the Company as at 31 December 2017, and the consolidated statements of income statement, comprehensive income, changes in equity and cash flows and the statements of income statement, comprehensive income, changes in equity and cash flows of the Company for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements and the separate financial statements give a true and fair view of the financial position of the Group and the Company as at 31 December 2017, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS-EU") and the requirements of the Cyprus Companies Law, Cap. 113, as amended from time to time (the "Companies Law, Cap. 113").
We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the audit of the financial statements" section of our report. We are independent of the Group and Company in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants ("IESBA Code"), and the ethical requirements in Cyprus that are relevant to our audit of the consolidated financial statements and the separate financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements and the separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements and the separate financial statements, as a whole, and in forming our opinion thereon and we do not provide a separate opinion on these matters.
| Valuation of properties | |
|---|---|
| See Notes 15 and 16 to the consolidated financial statements | |
| The key audit matter | How the matter was addressed in our audit |
| The Group's properties include investment property portfolio of US\$818,060 thousand and investment property under development portfolio of US\$163,240 thousand together representing 69% of the Group's total assets as at 31 December 2017. The valuation of the Group's properties is inherently subjective |
Our audit procedures included evaluating the competence, capability, and objectivity of the Group's external property valuers, while considering fee arrangements between the valuers and other engagements which might exist. We carried out procedures, on a sample |
| due to, among other factors, the individual nature of each property, its location and the expected future rental revenue for that particular property. For developments, factors include projected costs to complete and timing until practical completion. The existence of significant estimation uncertainty, could result in a material misstatement, warrants specific audit focus in this area. |
basis, to satisfy ourselves of the accuracy of the property information supplied to valuers by management. For properties under development we assessed the consistency of the outstanding construction costs supplied to the valuers to the Group's project budget. We assessed, on a sample basis, using also our own experts the appropriateness of the valuation methodologies and assumptions used based on our experience and knowledge of the market and by comparing them to market data. We held discussions on key findings with the external property valuers and challenged various key inputs such as discount, vacancy and exit capitalisation rates used on a sample of properties within the property portfolio. |
|---|---|
| ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
The Board of Directors is responsible for the other information. The other information comprises the management report, the corporate governance statement included in the management report, the preliminary statement of results, the executive chairman's statement, the management discussion and analysis of financial condition and results of operations (but does not include the consolidated financial statements and our auditor's report thereon), which we obtained prior to the date of this auditor's report and the annual report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, except as required by the Companies Law, Cap.113.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact.
With regards to preliminary statement of results, the executive chairman's statement, the management discussion and analysis of financial condition and results of operations we have nothing to report.
With regards to the management report and the corporate governance statement, our report is presented in the "Report on other legal requirements" section.
When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.
The Board of Directors is responsible for the preparation of consolidated financial statements and separate financial statements that give a true and fair view in accordance with IFRS-EU and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board
of Directors determines is necessary to enable the preparation of consolidated financial statements and separate financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements and the separate financial statements, the Board of Directors is responsible for assessing the Group's and Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is intention to either liquidate the Company or to cease operations, or there is no realistic alternative but to do so.
The Board of Directors is responsible for overseeing the Group's financial reporting process.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and separate financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Obtain sufficient appropriate evidence regarding the financial information of the entities or the business activities of the within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion
We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements and the separate financial statements of the current period and are therefore the key audit matters.
Pursuant to the requirements of Article 10(2) of EU Regulation 537/2014 we provide the following information, which is required in addition to the requirements of ISAs.
We were first appointed auditors of the Group by the General Meeting of the Company's members on 16 January 2002. Our appointment has been renewed annually by shareholder resolution. Our total uninterrupted period of engagement is 17 years covering the periods ending 31 December 2001 to 31 December 2017.
Our audit opinion is consistent with the additional report presented to the Audit Committee dated 13 April 2018.
We have not provided any prohibited NAS referred to in Article 5 of EU Regulation 537/2014 as applied by Section 72 of the Auditors Law of 2017, L.53(I)2017, as amended from time to time ("Law L.53(I)/2017").
Pursuant to the London Stock Exchange Listing Rules we are required to review:
We have nothing to report in respect of the above.
Other legal requirements
Pursuant to the additional requirements of law L.53(I)2017, and based on the work undertaken in the course of our audit, we report the following:
This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 69 of Law L.53(I)/2017 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.
The engagement partner on the audit resulting in this independent auditors' report is Maria H. Zavrou.
Maria H. Zavrou, FCCA Certified Public Accountant and Registered Auditor
For and on behalf of
KPMG Limited Certified Public Accountants and Registered Auditors 14 Esperidon Street 1087 Nicosia, Cyprus
16 April 2018
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