Echo Investment S.A. — Management Reports 2020

Mar 30, 2021

Message from CEO

CHAPTER 1

MANAGEMENT BOARD REPORT

General information about the Company and its Group

Management Board

Supervisory Board

The Strategy of Profitable Growth in action

Business model

Selected financial data of the Echo Investment Group

The main figures disclosed in the annual financial statements of Echo Investment S.A. and its Group

Operating segments of Echo Investment Group

Ownership structure of Echo Investment S.A. and description of shares

Volume of the Company’s shares and bonds held by managing and supervising persons

Major events in 2020 and material agreements for the operation of the Company and its Group

Material post-balance sheet events

Residential segment – market outlook and Echo Investment business activities

Office segment – market outlook and Echo Investment business activities

Retail segment – market outlook and Echo Investment business activities

Our employees and diversity policy

How we manage risk

Portfolio of properties

Main investments in 2020 – acquisition of plots

Output markets and sources of supplies of materials, goods and services

Composition of the Group

Financial liabilities of the Company and its Group

Off-balance sheet liabilities

Information on dividend policy and dividend

Assessment of financial resources management and investment plan feasibility

Factors and one-off events influencing the financial result in 2020 and in Q4 2020

External and internal factors significant for the development of Echo Investment S.A. and its group

Remuneration of the Management Board and Supervisory Board

Seasonal or cyclical nature of operations

Significant court, arbitration or public administration proceedings

Information on borrowings granted in 2020, including to related entities

Agreements concluded with an entity authorised to audit financial statements

Other disclosures required by law

The impact of the COVID-19 pandemic on the operations of Echo Investment Group

CHAPTER 2

STATEMENT ON THE APPLICATION OF CORPORATE GOVERNANCE PRINCIPLES

The Articles of Association of the Company and the most important corporate governance documents

Systems of internal control and risk management

Rules for amending the Company’s articles of association

The procedure of the general meeting, a description of shareholders’ rights and the manner of exercising them

Composition and changes in the management board

Description of principles regulating the appointment and dismissal of managerial staff and their rights

Composition of the Supervisory Board and its changes

Company’s supervisory board – rules of operation

Composition of the Audit Committee and its changes

The responsibilities of the Audit Committee

Investment Committee

Echo Investment S.A. shareholding structure and shareholders’ rights

CHAPTER 3

STATEMENT OF THE MANAGEMENT BOARD

Contact

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Message from CEO

I am pleased to present to you the financial report of Echo Investment for 2020, the publication of which coincides with the 25th anniversary of our company’s presence on the Warsaw Stock Exchange. During this time we have managed to complete almost 200 projects in over 30 Polish cities, we have gained experience and gathered the best team necessary to create large, city-forming ‘destinations’ projects that meet the needs of cities and complement them. Last year we earned PLN 122 million of net profit, what was the result of hand over to clients 1,505 apartments, growth in value of our commercial projects under construction, as well as completed Resi4Rent projects.

The strategic directions

Taking into account the new reality in which we operate, social trends, and changing client preferences, our company focuses on growing the residential sector. Apartments for sale and for rent account today for about a quarter of our assets. Due to the high prospects for this sector in Poland and the lower need for external financing of this business, it is our ambition to increase significantly proportion of residential assets in our balance sheet. A lower level of indebtedness of the entire Group will be the positive result of this strategy. It is worth emphasizing that we intend to keep our business diversified. We will maintain our strong position in the office sector, as well as remain active in the retail sector focusing on destination projects where food and beverage is a crucial element. We are ready to implement this strategy. In recent years, we have focused on the purchase of large plots of land, where complex and perfectly designed attractive parts of the city can be built. In February this year, we concluded a preliminary agreement for the purchase of a 66% stake in the Wrocław-based developer Archicom, as a result of which the Echo-Archicom group will become the biggest residential developer in Poland.

Residential sector

In 2020 we hit records both in sales and handovers of apartments. We managed to sign 1,570 sales contracts with clients, what outperformed last year’s results by 16%. At the same time, clients received their keys to 1,505 apartments, what meant a 19% increase compared to 2019. The sales only in Q4 2020 amounted to 464 units, while handovers – 792. In 2020, we completed the construction of eleven projects in Warsaw, Łódź, Poznań and Wrocław. We are constantly expanding our offer: last year, we have started the construction and sale of apartments in seven projects which added almost 1,300 apartments to the offer. After finalizing the purchase of the majority stake in Archicom, only in 2021 our group will start construction of 7,000 apartments. apartments for sale and rent. The acquisition is in line with our strategic goal of becoming a nationwide leader in the residential sector.

DEAR SHAREHOLDERS, PARTNERS AND CLIENTS,

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Resi4Rent

We are consistently developing Resi4Rent - the largest private company with apartments for rent in Poland. Currently, Resi4Rent has nearly 1.8 thous. apartments in Wrocław, Łódź and Warsaw. During 2021 we will complete another 460 apartments and start a construction of more than 3 thous. additional units. Ultimately, by 2025, it will offer 10 thousand. apartments in the six largest Polish cities - in Warsaw, Kraków, Łódź, Wrocław, Gdańsk and Poznań.

Offices

Last year, Echo Investment’s office department focused on completing the construction of office buildings as scheduled and on providing tenants for them. We have commissioned five buildings with a total area of over 125,000 sqm. At the end of the year, their average lease level exceeded 60%, but the current level of leasing and our advanced talks bring this ratio closer to approx. 85% now, that is making the buildings ready to be sold on the market.# Already in the first quarter of 2021, we sold Villa Oces in Warsaw and we are conducting advanced talks about the sale of other buildings. Our oce projects continue to win the trust of financial insti- tutions due to their high quality and the central locations in the dierent cities. In 2020, we obtained financing for the construction of the MidPoint71 projects in Wrocław and Fuzja in Łódź in the total amount of over EUR 90 million. Our company focuses on growing the residential sector. Apartments for sale and for rent account today for about a quarter of our assets. Due to the high prospects for this sector in Poland and the lower need for external nancing of this business, it is our ambition to increase signicantly proportion of residential assets in our balance sheet. A lower level of indebtedness of the entire Group will be the positive result of this strategy. We are ready to implement this strategy. In recent years, we have focused on the purchase of large plots of land, where complex and perfectly designed attractive parts of the city can be built. In February this year, we concluded a preliminary agreement for the purchase of a 66% stake in the Wrocław-based developer Archicom, as a result of which the Echo-Archicom group will become the biggest residential developer in Poland. e retail sector The retail sector was hit the hardest during the pandemic, mainly due to three lock-downs and con- tinually protracted restrictions. It has been a focus for our leasing and management departments to reach an agreement with tenants on principles for returning shopping centers. Through marketing campaigns and consistent brand building, we hope to quickly rebuild the footfall and turnover of Libero and Galeria Młociny, in close cooperation with our tenants. The most important event for our retail projects in 2020 was the opening of the first Primark store in Poland in Galeria Młociny in Warsaw. It was one of the most anticipated debuts on the Polish market, which definitely strengthens the attractiveness of this project. Bringing the brand to Poland is one of the greatest successes of the leasing department of Echo Investment. In 2020, the leasing process of Warsaw Brewery retail space was also completed. Tenants are finishing their premises and – with our support – they are getting ready to open their business. Financial position The financial situation of Echo Investment is stable. In 2020, we generated over PLN 122 million of consolidated net profit, and at the end of the period, we had cumulated PLN 327 million of cash on our accounts. In 2020 we have acquired attractive land properties for 275,000 sqm of residential and service space. With such a strong financial situation and an impressive land bank, we are ready to implement our strategy. I encourage you to read our financial report for 2020 in detail. Yours sincerely Nicklas Lindberg CEO of Echo Investment

CHAPTER 1 MANAGEMENT BOARD REPORT

Management Board Report on operations of Echo Investment S.A. and its Group in 2020

Echo Investment Group’s core activity consists in the construc- tion, lease and sale of oce and retail buildings, construction and sale of residential buildings as well as trade in real estate. The parent company Echo Investment S.A., with its oce in Kielce, al. Solidarności 36, was registered in Kielce on June 30, 1994. Echo is a Joint Stock Company entered in the National Court Register under no. 0000007025 by the District Court in Kielce, 10th Economic Division of the National Court Register. Since 5 March 1996, the Company’s shares are listed at the War- saw Stock Exchange on the regulated market, sector – WIG – Real Estate. The parent entity is Lisala Sp. z o.o., and the ulti- mate parent of the group is WING IHC Zrt. The Company was established for an indefinite period of time.

General information about theCompany and its Group  Kielce

• 1996 First listing of Echo Investment on the WSE.

Management Board Report on operations of Echo Investment S.A. and its Group in 2020

Management Board

Professional CV’s of the Board Members are presented in the Corporate Governance section on page 114.

• Nicklas Lindberg President of the Board, CEO
• Maciej Drozd Vice-President of the Board, CFO
• Artur Langner Vice-President of the Board
• Marcin Materny Member of the Board
• Rafał Mazurczak Member of the Board
• Waldemar Olbryk Member of the Board
• Małgorzata Turek Member of the Board

Management Board Report on operations of Echo Investment S.A. and its Group in 2020

Supervisory Board

Professional CV’s of the Board Members are presented in the Corporate Governance section on page 119.

• Margaret Dezse Independent Supervisory Board Member Chair of the Audit Committee
• Noah M. Steinberg Chairman
• Tibor Veres Deputy Chairman
• Sławomir Jędrzejczyk Independent Supervisory Board Member Deputy Chairman of the Audit Committee
• Maciej Dyjas Supervisory Board Member
• Nebil Senman Supervisory Board Member Audit Committee Member
• Bence Sass Supervisory Board Member
• Péter Kocsis Supervisory Board Member

Management Board Report on operations of Echo Investment S.A. and its Group in 2020

The Strategy of Profitable Growth in action 

In 2016, the Management Board of Echo Investment prepared and introduced the Strategy of Profitable Growth with the ap- proval of the Supervisory Board. The strategic directions con- firmed in 2020 place particular emphasis on the Group’s devel- opment in the residential sector and increasing the importance of multifunctional, large destination projects in the pipeline.

EFFECTS OF THE STRATEGY OF PROFITABLE GROWTH IMPLEMENTATION

LEADERSHIP

Actions

Echo Investment is the largest development company operating in Poland in terms of the number and area of projects implemented. We are active in three sectors of real estate: oce, retail and residential – including new sector of apartments for rent. The strategy of profitable growth assumes that Echo Investment will be one of the top developers in each of these sectors separately. Our large scale of operations will allow for the optimal use of resources.

• Strengthening the position in the residential sector by taking bigger share in the market: from c.a. 600 apartments sold annually until 2015 to c.a. 1,570 units in 2020;
• Purchase in 2021 of a majority stake in the residential developer Archicom, making the group one of the top three developers selling apartments and a leader in terms of the number of apartments under construction (including Resi4Rent);
• Preparation of residential projects allowing for further advancement in the ranking;
• Entering a new market niche of apartment for rent by developing a company Resi4Rent in cooperation with a reputable financial partner;
• Maintaining the leading position in the oce market (in terms of space under construction and preparation, as well as rental);
• Search for new business niches, including in short-term rental (through the development of CitySpace);
• Maintaining the leading position in the retail sector (in terms of relations with tenants and innovative approach);
• Strengthening our competitive advantage by preparation and construction of multifunctional projects that enable us to combine dierent competencies and implement projects faster.

LARGE DESTINATION PROJECTS

Actions

Echo Investment’s many years of experience in three real estate sectors gives a competitive advantage consisting in the ability to implement large, multifunctional and city- forming projects. Thanks to this, the Group can buy larger areas, with regard to which the unit price is lower and the competition among buyers is much smaller. Combining the functions provides for faster completion of the project and comprehensive design of the urban space.

• The construction of projects combining oce, retail, enter- tainment and residential functions – Warsaw Brewery, Moje Miejsce (Beethovena), Reset in Warsaw and Fuzja in Lodz with very good social reception;
• Preparation of other multifunctional projects at ul. Towaro- wa 22 in Warsaw, Wita Stwosza in Kraków, Opieńskiego in Poznań, KEN in Warsaw, Kapelanka in Kraków and Widze- wska in Łódź;
• Signing preliminary agreement for a plot in Sluzewiec Przemysłowy, Warsaw (Empark);
• Search for other large areas for multifunctional purposes.

Management Board Report on operations of Echo Investment S.A. and its Group in 2020

DEVELOPMENT ACTIVITY

Actions

The adopted business model focuses on the development activity, which consists of operations such as the purchase of a plot (real estate), project preparation, construction, leasing, sale of apartments, active management to increase the market value and then sale of finished oce and retail projects in optimal time for the possible return ratio, capital management, market expectations and trends. Echo Investment does not want to be a long-term owner of completed projects and the income from oce or retail rent accounts for a minority portion of its total revenue. Commercial and residential properties under construction constitute majority of the group’s assets.

• Separation of working oce and retail assets in 2016 to another company – EPP and sale of all of its shares in 2016-2018;
• Sales of finished oce and retail project in optimal time for the possible return ratio, capital management, market expectations and trends – including sales of buildings still remaining under construction or soon after their comple- tion;
• Conducting the sales process of residential projects in such a way that 80% of units are sold at the time of com- pletion;
• Provision of development services to external companies for remuneration.

FOCUS ON POLAND

Actions

It is the largest country and real estate market in Central and Eastern Europe. Echo Investment, as an entity which has operated here for over two decades, knows its potential, realities and principles of functioning very well.# Management Board Report on operations of Echo Investment S.A. and its Group in 2020

We focus on the execution of projects in seven most important cities of the country, which are the most attractive and liquid real estate markets: Warsaw, Tri-City, Wrocław, Poznań, Katowice, Kraków and Łódź.
* Purchase of real estate for future projects only in the seven largest Polish cities;
* Disposal of non-core projects abroad;
* Disposal of non-core projects (including in Częstocho- wa, Kielce, Kraków, Lublin, Poznań, Koszlin, Słupsk and Warsaw).

STRATEGIC COOPERATION WITH RELIABLE PARTNERS

Echo Investment values long-term business relations with reliable partners, that created synergies for both sides. Development activities of Echo Investment are complementary to these entities. Such cooperation facilitates expanding Echo’s scale of operation, accelerates speed of projects implementation and limits risks. Echo Investment assumes entering into joint-ventures for projects requiring significant capital expenditures, providing its partners with services such as development, planning, leasing, accounting etc. Partners may also be offered by Echo with priority to acquire ready projects on market conditions. Material agreements between Echo Investment and its partners need to be discussed and approved by the Supervisory Board.

• Partnership with EPP on large and capital-intensive commercial as well as multi-functional projects (Galeria Młociny, Towarowa 22 in Warsaw), in which Echo has 30% stake and conducts the development and leasing process for remuneration;
• Partnership with a global fund manager on the development of Resi4Rent, in which Echo Investment holds 30% stake and for which it provides development services for fee.

Business model

Echo Investment Group runs the entire investment process in-house, starting with acquisition of property, through obtaining administrative permits, financing and oversight of construction, to leasing, completion, active property management to increase its value, taking decision of sale and execution of this decision in optimal moment from return, cash management, expectation and market trends. These steps are taken in most cases through the special purpose vehicles (SPV).

The core business of Echo Investment Group falls into the following categories:
1. construction, lease, active property management to increase its value and sale of office buildings,
2. construction, lease, active property management to increase its value and sale of retail buildings,
3. construction and sale of residential apartments
4. provision of services (general contractor, managing contractor, leasing, consulting etc.).