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Frontier Development PLC — Interim / Quarterly Report 2019
Aug 27, 2019
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Interim / Quarterly Report
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RNS Number : 1528K
AFI Development PLC
27 August 2019
THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION
IN OR INTO THE RUSSIAN FEDERATION, THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN
27 August 2019
AFI DEVELOPMENT PLC
("AFI DEVELOPMENT" OR "THE COMPANY")
RESULTS FOR THE SIX MONTHS TO 30 JUNE 2019
Residential presales drive positive momentum
AFI Development, a leading real estate company focused on developing property in Russia, today announces its financial results for the six months ended 30 June 2019.
H1 2019 financial highlights
· Revenue for 6 months of 2019 totalled US$182.0 million, including proceeds from the sale of trading properties:
- Rental and hotel operating income was US$63.2 million
- AFIMALL City contribution for the period was US$44.2 million
- Sale of residential properties contributed US$116.6 million to total revenue
· Gross profit for the 6 months period was US$92.8 million
· Net profit for H1 2019 amounted to US$37.6 million
· Total gross value of portfolio of properties stood at US$1.24 billion
· Cash, cash equivalents and marketable securities as of 30 June 2019 amounted to US$99.1 million
H1 2019 operational highlights
· Following the delivery of Building 6 at Odinburg in May 2019, the transfer of apartments to customers continues to schedule. The construction and presale of apartments in Building 3 (Phase I) and Building 3 (Phase II) are also underway. As of 16 August 2019, the number of signed sale contracts stood at 766 (83% of total) in Building 3 (Phase I), 93 (7% of total) in Building 3 (Phase II) and 215 (96% of total) in Building 6
· At AFI Residence Paveletskaya, Phase II was delivered in May 2019 and the transfer of apartments to customers is ongoing. The construction and presale of apartments in Phase III continue. As of 16 August 2019, 588 contracts for the sales and pre-sales of apartments and "special units" had been signed (73% of Phase I, Phase II and Phase III combined)
· At Bolshaya Pochtovaya, construction and marketing of the project are progressing to plan. As of 16 August 2019, 313 apartments (50% of Phases I, II and III combined) had been pre-sold to customers
· The construction and pre-sale of properties at Botanic Garden are ongoing. As of 16 August 2019, 426 apartments (53% of Phase I) had been pre-sold to customers
· In H1 2019, the Company commenced construction works at two grade A office developments in central Moscow: Tverskaya Plaza Ic and Tverskaya Plaza IV. Both properties are located near the Belorussky railway station in a busy and well developed office district
· At AFIMALL City, the net operating income ('NOI') for H1 2019 was US$34.3 million
Commenting on today's announcement, Eli Avrahampour, Chairman of AFI Development, said:
"I am pleased to report positive momentum in our financial and operational results for H1 2019, owing largely to the recognition of residential presales and the stable performance of the yielding portfolio.
During the period, we leveraged our improving profitability to reduce our external debt and to repay US$107.2 million to VTB Bank relating to a number of existing loans.
At the same time, we are concerned with pace of sales across our residential portfolio, which remains subject to volatile market conditions, and with general vulnerability of the Russian economy to external and internal challenges."
H1 2019 Results Conference Call:
AFI Development will hold a conference call for analysts and investors to discuss its H1 2019 financial results on Wednesday, 28 August 2019.
Details for the conference call are as follows:
Date: Wednesday, 28 August 2019
Time: 3pm BST (5pm Moscow)
Dial-in Tel: International: +44 (0)20 3003 2666 / UK toll free: 0808 109 0700
Password: AFI Development
To take part in the conference call, please dial in approximately 5 minutes before the start of the event.
Prior to the conference call, the H1 2019 Investor Presentation of AFI Development will be published on the Company website at http://www.afi-development.com/en/investor-relations/reports-presentations on 28 August 2019 by 11am BST (1pm Moscow time).
- ends -
For further information, please contact:
AFI Development, +7 495 796 9988
Ilya Kutnov, Corporate Affairs/Investments Director (Responsible for arranging the release of this announcement)
Citigate Dewe Rogerson, London +44 20 7638 9571
Sandra Novakov
Lucy Eyles
This announcement contains inside information.
About AFI Development
Established in 2001, AFI Development is one of the leading real estate development companies operating in Russia.
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 and quality of 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. 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.
AFI Development is a leading force in urban regeneration, breathing new life into city squares and neighbourhoods and transforming congested and underdeveloped areas into thriving new communities. The Company's long-term, large-scale regeneration and city infrastructure projects establish the necessary groundwork for the successful launch of commercial and residential properties, providing a strong base for the future.
Legal disclaimer
Some of the information in these materials may contain projections or other forward-looking statements regarding future events, the future financial performance of the Company, its intentions, beliefs or current expectations and those of its officers, directors and employees concerning, among other things, the Company's results of operations, financial condition, liquidity, prospects, growth, strategies and business. You can identify forward looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could," "may" or "might" or the negative of such terms or other similar expressions. These statements are only predictions and that actual events or results may differ materially. Unless otherwise required by applicable law, regulation or accounting standard, the Company does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Company, including, among others, general economic conditions, the competitive environment, risks associated with operating in Russia and market change in the industries the Company operates in, as well as many other risks specifically related to the Company and its operations.
Chairman's statement
We are pleased to report year-on-year growth in both revenue and gross profit in the first six months of 2019. This is owing largely to residential presales recognition that was responsible for approximately 62% of our total revenue, which grew to almost US$182 million. Meanwhile, the Russian economy remains subject to international sanctions, including the most recent executive order of the U.S. President prohibiting U.S. banks from participating in the issuance of Russian sovereign debt (introduced in August 2019 for a period of 12 months).
As reported in Q1 2019, near completion of several of our residential projects (Odinburg, AFI Residence Paveletskaya, Bolshaya Pochtovaya and Botanic Garden) has allowed us to recognise increased revenue and profit in the first six months of 2019. As a result, our gross profit for the period amounted to US$92.8 million.
Rental and hotel operating income was broadly unchanged compared to H1 2018 at US$63.2 million.
During H1 2019, we significantly reduced our external debt to VTB Bank PJSC. In May 2019, we repaid US$38.9 million of the Plaza Spa Kislovodsk and Plaza Spa Zhelznovodsk loans, while in June 2019 we repaid US$68.4 million of the AFIMALL City loan. As of 30 June 2019, our total outstanding bank loans amounted to US$400.4 million.
During H1 2019 we also commenced construction works at two of our grade A office projects in the Tverskaya Zastava Area in Moscow: Tverskaya Plaza Ic and Tverskaya Plaza IV. The construction of both properties is being funded by equity.
While our current financial results reflect strong residential sales, volatile market conditions may affect our ability to reach our internal sales targets going forward, which, in turn, may influence our ability to secure necessary financing for our projects.
Projects update
AFIMALL City
Occupancy at the end of the second quarter remained unchanged compared to Q1 2019, at 90%. In June 2019, AFI Development partially repaid the euro-denominated part of the AFIMALL City project loan to VTB Bank PJSC, in the amount of EUR 60 million (US$68.4 million).
Odinburg
At the Odinburg residential development, Building 6 (Phase II) was state commissioned in May 2019 and the delivery of its presold apartments to customers has been ongoing. Construction works remain underway at Building 3 (Phase I) and Building 3 (Phase II). As of 16 August 2019, the number of signed sale contracts stood at 766 (83% of total) in Building 3 (Phase I), 93 (7% of total) in Building 3 (Phase II) and 215 (96% of total) in Building 6.
Following changes in federal and municipal legislation regarding urban planning, the area of the Odinburg project has become subject to the new regime on complex sustainable territory development. The new legislative regime requires a new form of agreement between municipal authorities and a developer - a so called "complex sustainable territory development agreement" ("CSTDA"). To enter into a CSTDA, in January 2019 AFI Development applied for a termination of the original investment agreement to the Moscow Region authorities, which requested that the investment agreement be terminated by a court decision. In Q2 2019, the Arbitration Court of the Moscow region ruled that the current investment agreement does not meet the new legislative requirements and should be terminated. During the court hearing, the Moscow Region authorities supported the Company's position and did not object to the court decision.
At the same time, AFI Development entered into negotiations with the Moscow region authorities regarding a CSTDA, which would meet the new legislative requirements. The gross sellable area of residential housing (461,000 sqm) and commercial areas (16,400 sqm) that can be constructed at Odinburg, as well other key business terms of the terminated investment agreement and its addenda, will not be adversely affected by the new agreement. The Company expects the CSTDA to be signed in Q1 2020 and believes that the risk of this agreement not being signed is low. In the event the CSTDA is not signed, according to the Company's preliminary analysis, it may lose the right to build between circa 113,000 and 176,738 sqm of residential gross sellable area at the site of the project.
Currently, all construction works and marketing at Odinburg continue as planned.
AFI Residence Paveletskaya
Following the delivery of Phase II in May 2019, the transfer of apartments to customers has been ongoing. The focus in construction and presale of apartments is now on Phase III of the development. As of 16 August 2019, 588 contracts for sales and pre-sales of both apartments and "special units" had been signed (73% of Phases I, II and III combined).
Bolshaya Pochtovaya
The pre-sales and marketing are ongoing in all three phases of the project. As of 16 August 2019, 313 apartments (50% of Phases I, II and III) had been pre-sold to customers.
Botanic Garden
Construction and pre-sales are also progressing at Botanic Garden. As of 16 August 2019, 426 apartments (53% of Phase I) had been pre-sold to customers.
Tverskaya Plaza Ic and Tverskaya Plaza IV
In Q1 2019, AFI Development launched construction works at its grade A prime office project in central Moscow Tverskaya Plaza Ic. In Q2 2019, construction works were also launched at another grade A office development at Tverskaya Plaza IV. Both projects are located within walking distance from each other. Due to a revival in the office market driven by limited new development in the central areas of Moscow, the Company believes both properties will be in high demand by tenants at the time of their completion.
AFI Development is currently financing construction of both properties with own capital; however, talks with banks regarding potential project finance are underway to ensure additional financing is available if required.
Market overview - general Moscow real estate
Macroeconomic environment
The Russian economy is expected to grow at a moderate rate over the coming years. The Organisation for Economic Co-operation and Development ("OECD") expects a 2019 GDP growth rate of 1.38% and 2.07% for 2020.
In Q2 2019, the RUR/US$ exchange rate fluctuated between 62.6 and 65.4 roubles per dollar. The rate at 30 June 2019 was RUR63.08 (vs. RUR64.73 on 31 March 2019).
The Central Bank of Russia ("CBR") decreased its key lending rate by 25 bps to 7.5% in June and by a further 25 bps to 7.25% in July 2019. Its rationale for the rate cuts included lower than expected economic growth and rising inflation.
Consumer price inflation in June 2019 was 4.7% (annualised), against the CBR target rate of 4.0%. The CBR expects inflation to reach this target in "early 2020".
(Source: OECD, the Bank of Russia, RBC)
Moscow office market
According to Cushman & Wakefield ("C&W"), new supply in H1 2019 amounted to 120,000 sqm of new space in classes A and B office buildings combined (mostly in Q2), compared to 41,000 sqm delivered in H1 2018. The largest delivered project was the Iskra Park Class A business centre (62,000 sqm of gross leasable area).
The take up in H1 2019 was about 962,000 sqm, a 1% increase year-on-year, with demand driven largely by the banking and IT sectors. Vacancy rates in class A and B have somewhat stabilised. According to C&W, the vacancy rate in Class A office buildings stood at 13.3% at the end of Q2 2019 (vs 14.0% in Q2 2018) and in Class B at 10.5% (vs 10.9% in Q2 2018). The overall vacancy rate for this market segment was 11.2% (vs 11.6% in Q2 2018). The rents in H1 2019 remained stable in dollar terms but experienced slight growth in rouble terms, especially in Class B buildings. Rouble denominated rents continue to prevail. Dollar denominated transactions accounted for 8.5% of all transactions during H1 2019.
(Source: C&W Marketbeat July 2019)
Moscow retail market
One new shopping centre was opened Moscow in H1 2019 - Salaris in "New Moscow", with a gross leasable area of a 105,000. Development activity in the sector remains at historically low levels.
Just six new brands entered the market in H1 2019. Most of these brands were in the fashion, footwear and cosmetics segments. Retailers and restaurateurs experiment with new formats including food markets, restaurant courts, "dark kitchens". IKEA has now opened a first "in city" 8,000 sqm unit (about 3 times smaller in size than a regular IKEA).
The vacancy rate across Moscow shopping centres at the end of H1 2019 was 8.2% (C&W).
Turnover rent with a low minimum rent continues to be the most common lease structure. Rouble denominated rents prevail in retail. According to C&W, turnover rent for a gallery retailer is in the range of 12%-15% of sales revenues (3-7% for large anchor tenants).
The most common lease structure continues to include a combination of a low minimum rent coupled with turnover rent, with fixed exchange rates commonly offered to tenants.
(Source: C&W Marketbeat July 2019, CBRE Moscow Retail Market Overview, H1 2019)
Moscow and Moscow Region residential market
Moscow
At the end of H1 2019, the supply to the "Old Moscow" primary residential market (including "apartments") was about 3.04 million sqm (about 42,585 residential units in 331 projects), a 1.7% decrease compared to the end of 2018 (data by Metrium).
By the end of H1 2019, the weighted average asking price in the newly built business class residential market in Moscow amounted to RUR235,805 per sqm (US$3,627, US$/RUB = 65). Compared with the end of Q1 2019, the average prices increased by 2.3% in roubles. In the mass segment, the weighted average asking price was RUR167,820 psqm, an increase of 1.3% compared to the end of Q1 2019 (US$2,582, US$/RUB = 65) (data by Metrium).
The Moscow region
At the end of H1 2019, the weighted average price per sqm in the Moscow region was RUR83,100 (US$1,278, USD/RUB = 65) (data by Azbuka Zhilya).
(Source: Metrium H1 2019 Results on the Moscow Residential Market, Azbuka Zhilya online database)
| Elias Ebrahimpour (Eli Avrahampour) Chairman of the Board |
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the period from 1 January 2019 to 30 June 2019
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the period from 1 January 2019 to 30 June 2019
C O N T E N T S
Independent auditors' report on review of condensed consolidated interim financial information
Condensed consolidated income statement
Condensed consolidated statement of comprehensive income
Condensed consolidated statement of changes in equity
Condensed consolidated statement of financial position
Condensed consolidated statement of cash flows
Notes to the condensed consolidated interim financial statements
Independent auditors' report on review of condensed consolidated interim financial information to the members of AFI DEVELOPMENT PLC
Introduction
We have reviewed the accompanying condensed consolidated statement of financial position of AFI Development PLC as at 30 June 2019, the condensed consolidated statements of income, comprehensive income, changes in equity and cash flows for the six-month period then ended, and notes to the interim financial statements ('the condensed consolidated interim financial statements'). The Company's Board of Directors is responsible for the preparation and presentation of these condensed consolidated interim financial statements in accordance with IAS 34 "Interim Financial Reporting". Our responsibility is to express a conclusion on these condensed consolidated interim financial statements based on our review.
Scope of Review
We conducted our review in accordance with the International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial statements as at 30 June 2019 are not prepared, in all material respects, in accordance with IAS 34 "Interim Financial Reporting".
Marios G. Gregoriades, CPA
Certified Public Accountant and Register Auditor
For and on behalf of
KPMG Limited
Certified Public Accountants and Registered Auditors
14 Esperidon Street
1087 Nicosia, Cyprus
26 August 2019
CONDENSED CONSOLIDATED INCOME STATEMENT
For the period from 1 January 2019 to 30 June 2019
| For the six months ended |
For the six months ended |
||
| 30/6/19 | 30/6/18 | ||
| US$ '000 | US$ '000 | ||
| Note | |||
| Revenue | 6 | 181,952 | 142,021 |
| Other income | 1,197 | 781 | |
| Operating expenses | 8 | (28,598) | (30,421) |
| Cost of sales of trading properties | 14,15 | (59,317) | (50,415) |
| Administrative expenses | 7 | (2,034) | (2,576) |
| Other expenses | (408) | (3,627) | |
| Total expenses | (90,357) | (87,039) | |
| Gross Profit | 92,792 | 55,763 | |
| Profit on sale of investment property | 11 | 10,220 | - |
| (Decrease)/increase in fair value of properties | 11,12 | (30,387) | 42,567 |
| Results from operating activities | 72,625 | 98,330 | |
| Finance income | 13,060 | 17,365 | |
| Finance costs | (20,132) | (19,212) | |
| Net finance (costs)/income | 9 | (7,072) | (1,847) |
| Profit before tax | 65,553 | 96,483 | |
| Tax expense | 10 | (27,967) | (19,815) |
| Profit for the period | 37,586 | 76,668 | |
| Profit attributable to: | |||
| Owners of the Company | 37,498 | 76,452 | |
| Non-controlling interest | 88 | 216 | |
| 37,586 | 76,668 | ||
| Earnings per share | |||
| Basic and diluted earnings per share (cent) | 3.58 | 7.30 |
The notes form an integral part of the condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the period from 1 January 2019 to 30 June 2019
| For the six months ended |
For the six months ended |
|
| 30/6/19 | 30/6/18 | |
| US$ '000 | US$ '000 | |
| Profit for the period | 37,586 | 76,668 |
| Other comprehensive income Items that are or may be reclassified subsequently to profit or loss |
||
| Foreign currency translation differences for foreign operations | 52,694 | (41,108) |
| Other comprehensive income for the period | 52,694 | (41,108) |
| Total comprehensive income for the period | 90,280 | 35,560 |
| Total comprehensive income attributable to: | ||
| Owners of the parent | 90,232 | 35,332 |
| Non-controlling interests | 48 | 228 |
| 90,280 | 35,560 | |
The notes form an integral part of the condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the period from 1 January 2019 to 30 June 2019
| Attributable to the owners of the Company | Non-controlling interests | Total equity | ||||||
| Share | Share | Capital | Translation | Retained | ||||
| Capital | Premium | Reserve | Reserve | Earnings | Total | |||
| US$ '000 | US$ '000 | US$ '000 | US$ '000 | US$ '000 | US$ '000 | US$ '000 | US$ '000 | |
| Balance at 1 January 2019 | 1,048 | 1,763,409 | (19,333) | (371,659) | (627,324) | 746,141 | (63) | 746,078 |
| Total comprehensive income for the period | ||||||||
| Profit for the period | - | - | - | - | 37,498 | 37,498 | 88 | 37,586 |
| Other comprehensive income | - | - | - | 52,734 | - | 52,734 | (40) | 52,694 |
| Total comprehensive income for the period | - | - | - | 52,734 | 37,498 | 90,232 | 48 | 90,280 |
| Balance at 30 June 2019 | 1,048 | 1,763,409 | (19,333) | (318,925) | (589,826) | 836,373 | (15) | 836,358 |
| Balance at 1 January 2018 | 1,048 | 1,763,409 | (19,333) | (301,287) | (672,719) | 771,118 | (171) | 770,947 |
| Adjustment on initial application of IFRS 15 net of tax | - | - | - | 581 | 13,885 | 14,466 | 73 | 14,539 |
| Adjusted balance at 1 January 2018 | 1,048 | 1,763,409 | (19,333) | (300,706) | (658,834) | 785,584 | (98) | 785,486 |
| Total comprehensive income for the period | ||||||||
| Profit for the period | - | - | - | - | 76,452 | 76,452 | 216 | 76,668 |
| Other comprehensive income | - | - | - | (41,120) | - | (41,120) | 12 | (41,108) |
| Total comprehensive income for the period | - | - | - | (41,120) | 76,452 | 35,332 | 228 | 35,560 |
| Balance at 30 June 2018 | 1,048 | 1,763,409 | (19,333) | (341,826) | (582,382) | 820,916 | 130 | 821,046 |
The notes form an integral part of the condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2019
| 30/6/19 | 31/12/18 | |||
| Note | US$ '000 | US$ '000 | ||
| Assets | ||||
| Investment property | 11 | 705,140 | 742,590 | |
| Investment property under development | 12 | 145,840 | 141,880 | |
| Property, plant and equipment | 13 | 72,975 | 67,868 | |
| Long-term loans receivable | 29 | 2,811 | ||
| Trade and other receivables | 16 | 1,194 | - | |
| Intangible assets | 804 | 230 | ||
| Other investments | 18 | 5,335 | 5,244 | |
| Non-current assets | 931,317 | 960,623 | ||
| Trading properties | 14 | 17,171 | 19,082 | |
| Trading properties under construction | 15 | 307,002 | 278,800 | |
| Other investments | 18 | 9,002 | 11,168 | |
| Non-financial assets | 21 | 14,430 | - | |
| Inventories | 1,216 | 1,120 | ||
| Short-term loans receivable | 651 | 578 | ||
| Trade and other receivables | 16 | 63,458 | 54,620 | |
| Current tax assets | 3,756 | 4,431 | ||
| Cash and cash equivalents | 17 | 90,117 | 89,003 | |
| Current assets | 506,803 | 458,802 | ||
| Total assets | 1,438,120 | 1,419,425 | ||
| Equity | ||||
| Share capital | 1,048 | 1,048 | ||
| Share premium | 1,763,409 | 1,763,409 | ||
| Translation reserve | (318,925) | (371,659) | ||
| Capital reserve | (19,333) | (19,333) | ||
| Retained earnings | (589,826) | (627,324) | ||
| Equity attributable to owners of the Company | 19 | 836,373 | 746,141 | |
| Non-controlling interests | (15) | (63) | ||
| Total equity | 836,358 | 746,078 | ||
| Liabilities | ||||
| Long-term loans and borrowings | 20 | 384,010 | 487,348 | |
| Deferred tax liabilities | 71,641 | 54,772 | ||
| Deferred income | 11,638 | 11,964 | ||
| Non-current liabilities | 467,289 | 554,084 | ||
| Short-term loans and borrowings | 20 | 16,691 | 16,433 | |
| Trade and other payables | 21 | 62,602 | 37,378 | |
| Advances from customers | 23 | 51,974 | 65,407 | |
| Current tax liabilities | 3,206 | 45 | ||
| Current liabilities | 134,473 | 119,263 | ||
| Total liabilities | 601,762 | 673,347 | ||
| Total equity and liabilities | 1,438,120 | 1,419,425 | ||
The condensed consolidated interim financial statements were approved by the Board of Directors on 26 August 2019.
The notes form an integral part of the condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from 1 January 2019 to 30 June 2019
| 1/1/19- | 1/1/18- | ||
| 30/6/19 | 30/6/18 | ||
| Note | US$ '000 | US$ '000 | |
| #### Cash flows from operating activities | |||
| Profit for the period | 37,586 | 76,668 | |
| Adjustments for: | |||
| Depreciation | 13 | 487 | 463 |
| Net finance costs | 9 | 6,157 | 947 |
| Decrease/(Increase) in fair value of properties | 11,12 | 30,387 | (42,567) |
| Gain on sale of investment property | 11 | (10,220) | - |
| Reversal of trading properties under construction write-down of prior years | 15 | (5,676) | - |
| Tax expense | 10 | 27,967 | 19,815 |
| 86,688 | 55,326 | ||
| Change in trade and other receivables | (7,611) | 13,314 | |
| Change in inventories | 18 | 112 | |
| Change in trading properties and trading properties under construction | 14,15 | 47 | (9,832) |
| Change in advances and amounts payable to builders of trading properties under construction | 15 | 13,968 | (9,764) |
| Change in advances from customers | 23 | (25,244) | 12,605 |
| Change in trade and other payables | (1,181) | (24,200) | |
| Change in VAT recoverable | (2,331) | 5,871 | |
| Change in deferred income | (1,486) | 1,533 | |
| Cash generated from operating activities | 62,868 | 44,965 | |
| Taxes paid | (6,897) | (10,304) | |
| Net cash from operating activities | 55,971 | 34,661 | |
| Cash flows from investing activities | |||
| Proceeds from sale of other investments | 18 | 4,180 | 5,752 |
| Proceeds from sale of investment property | 11 | 68,681 | - |
| Proceeds from sale of property, plant and equipment | 13 | 77 | 55 |
| Change in advances and amounts payable to builders | 16,21 | (571) | (235) |
| Payments for construction of investment property under development | 12 | (9,261) | (1,320) |
| Payments for the acquisition/renovation of investment property | 11 | (227) | (383) |
| Change in VAT recoverable | (965) | (355) | |
| Acquisition of property, plant and equipment | 13 | (728) | (639) |
| Acquisition of other investments | 18 | - | (21,241) |
| Acquisition of intangible assets | - | (930) | |
| Proceeds from repayments of loans receivable | 2,689 | 447 | |
| Interest received | 2,007 | 561 | |
| Payments for loans receivable | - | (2,023) | |
| Net cash from investing activities | 65,882 | (20,311) |
The notes form an integral part of the condensed consolidated interim financial statements.
| 1/1/19- | 1/1/18- | ||
| 30/6/19 | 30/6/18 | ||
| Note | US$ '000 | US$ '000 | |
| Cash flows from financing activities | |||
| Proceeds from loans and borrowings | 20 | - | 542,873 |
| Repayment of loans and borrowings | 20 | (113,780) | (548,196) |
| Interest paid | (13,946) | (16,980) | |
| Net cash used in financing activities | (127,726) | (22,303) | |
| Effect of exchange rate fluctuations | 6,987 | 511 | |
| Net increase/(decrease) in cash and cash equivalents | 1,114 | (7,442) | |
| Cash and cash equivalents at 1 January | 89,003 | 95,468 | |
| Cash and cash equivalents at 30 June | 17 | 90,117 | 88,026 |
The notes form an integral part of the condensed consolidated interim financial statements.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the period from 1 January 2019 to 30 June 2019
1. INCORPORATION AND PRINCIPAL ACTIVITY
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 in 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 condensed consolidated interim financial statements ("interim financial statements") as at and for the six months ended 30 June 2019 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.
2. basis of Accounting
i. Going concern basis of accounting
The Russian economy was growing at moderate rates in the first half of 2019. The Rouble strengthened versus the dollar towards 30 June of 2019, the Central Bank of Russia has decreased its key lending rate twice, in June and July 2019. At the same time, the Russian economy remains subject to international sanctions, including the most recent executive order of the U.S. President prohibiting U.S. banks from participating in the issuance of Russian sovereign debt (introduced in August 2019 for a period of 12 months). In addition to that, legislation and tax changes affecting real estate sector are effective in 2019.
The Group has recognised a profit after tax of US$37.6 million for the six months period ended 30 June 2019. Its cash and cash equivalents and marketable securities remained stable at circa US$99.1 million.
The management estimates that the Group will continue to generate sufficient operating cash flows from yielding properties such as AFI Mall and Hotels and proceeds from sale of residential properties, to secure timely repayment of loans interest and principal.
Management succeeded in reducing debt by US$ 107.2 million, using proceeds from sale of Investment Properties and other operational inflows, resulting in reduced debt and cost of financing, allowing for easier future repayment of the principal and securing further operational existence for the foreseeable future.
Based on cash flow projection for the following 12 months 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 and to generate enough cash to cover its working capital requirements.
Considering all the above conditions and assumptions, 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 interim consolidated financial statements.
ii. Statement of compliance
These interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" and should be read in conjunction with the Group's last annual consolidated financial statements as at and for the year ended 31 December 2018 ('last annual financial statements'). They do not include all of the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last financial statements.
This is the first set of the Group's financial statements where IFRS 16 'Leases' has been adopted. Changes to significant accounting policies are described in Note 4.
These interim financial statements were authorised for issue by the Company's board of directors on 26 August 2019.
iii. Functional and presentation currency
These consolidated 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 thousands, except when otherwise indicated.
Foreign operations
Each entity of the Group determines its own functional currency and items included in the financial statements of each entity are measured using its functional currency. Where the functional currency of an entity of the Group is other than US Dollars, which is the presentation currency of the Group, then the financial statements of the entity are translated in accordance with IAS 21 'The effects of changes in foreign exchange rates".
The table below shows the exchange rates of Russian Roubles, which is the functional currency of the Russian subsidiaries of the Group, to the US Dollar which is the presentation currency of the Group:
Exchange rate % change % change
Russian Roubles six months year
As of: for US$1
30 June 2019 63.0756 (9.2)
31 December 2018 69.4706 20.6
30 June 2018 62.7565 9.0
Average rate during:
Six-month period ended 30 June 2019 65.3384 10.1
Six-month period ended 30 June 2018 59.3536 2.4
3. use of judgements and estimates
In preparing these interim financial statements, management has made 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 differ from these estimates.
The significant judgments made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the last annual consolidated financial statements, except for:
1) New significant judgements and key sources of estimation uncertainty related to the lessee accounting under IFRS 16, which are described in Note 4;
2) Change in significant judgement and estimates - during current period the management reassessed that the trading properties under development do not meet the definition of qualifying asset in terms of IAS 23 Borrowing costs. As a result, the significant financial component recognised on advances from customers during the six months period ended 30 June 2019 was recognised in the finance cost in the statement of profit or loss. In the prior year, the effect of significant financial component was capitalised in the trading properties under construction and then transferred to cost of sales in the period it was accrued as costs to fulfil the contract. The effect of this change was recognised prospectively, while the net effect on profit or loss was nil.
Measurement of fair values
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 these 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 audit committee.
When measuring the fair value of an asset or a liability, the Group uses market observable 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:
· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
· Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
· Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety 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.
4. CHANGES IN significant accounting policies
Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2018.
The changes in accounting policies are also expected to be reflected in the Group's consolidated financial statements as at and for the year ending 31 December 2019.
The Group has initially adopted IFRS 16 Leases from 1 January 2019. Although this adoption has an effect on the Group's accounting policy for leases as lessee (disclosed below), there was no significant effect on the amounts and balances in the Group's financial statements on 1 January 2019 and 30 June 2019. A number of other new standards are effective from 1 January 2019 but they do not have a material effect on the Group's financial statements.
Standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual periods beginning on or after 1 January 2020 and earlier application is permitted; however, the Group has not early adopted any new or amended standards in preparing these condensed consolidated interim financial statements.
The Group has no updates to information provided in the consolidated financial statements as at and for the year ended 31 December 2018 about the standards issued but not yet effective that may have a significant impact on the Group's consolidated financial statements.
IFRS 16 Leases
IFRS 16 introduced a single, on-balance sheet accounting model for lessees. As a result, a lessee, recognises right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lessor accounting remains similar to previous accounting policies.
The Group has applied IFRS 16 using the modified retrospective approach, under which any cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information presented for 2018 has not been restated - i.e. it is presented, as previously reported, under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below.
a. Definition of lease
Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a Lease. The Group now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.
b. As a lessee
The Group's lease portfolio consists primarily of land lease agreements for construction projects of residential real estate, investment properties, investments properties under development and hotel. As a lessee, the Group previously classified leases as operating leases. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities - i.e. these leases are on-balance sheet.
However, the Group has elected not to recognise right-of-use assets and lease liabilities for some leases of low-value assets (e.g. equipment, accommodation for employees). The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
i. Significant accounting policies
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. When a right-of-use asset meets the definition of investment property, it is presented in investment property. The right-of-use asset which is presented in investment property is measured at cost, and subsequently measured at fair value, in accordance with the Group's accounting policies.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The following assumptions are taken into consideration to determine present value of lease payments:
· Lease payments, that are determined based on the cadastral value of land and can be changed by lessor unilaterally, are considered as variable and are not taken into consideration to determine amount of lease liabilities, and are recognised in profit or loss or capitalised as they are accrued;
· Fees for changing the purpose of land usage are considered as a lease payment and are included into consideration to determine amount of lease liabilities;
· Lease terms are determined based on non-cancellable period according to lease agreement. The Group also considers the right to renew the lease contract if it is reasonable certain that such option will be exercised.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payment made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.
The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets recognised.
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right-of-use assets are measured as an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.
ii. Transition
Previously the Group classified property leases as operating leases under IAS 17. These include land leases. The leases typically are long term, or have a renewal option at the end of non-cancellable period. The lease payments in all the land leases held by the Group are determined as a percentage of cadastral value of that land.
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured as the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right-of-use assets are measured at either:
· their carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the lessee's incremental borrowing rate at the date of initial application; or
· an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.
The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17.
· Applied the exemption not to recognized right-of-use assets and liabilities for leases with less than 12 months of lease term.
· Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
b. As a lessor
The Group leases out its investment property. The Group has classified these leases as operating leases. The accounting policies applicable to the Group as a lessor are not different from those under IAS 17. For leases under which the Group acts as lessor, application of IFRS 16 Leases had no significant impact.
c. Impacts on financial statements
Impacts on transition and for the period
On transition at 1 January 2019 and at the period-end 30 June 2019, the Group did not recognise lease liabilities for its land leases because all the lease payments under such leases depend on cadastral value of the land, and as such are considered variable payments (as described in i. Significant accounting policies above) and were not included in the lease liability. Subsequently, right-of-use assets were not recognised, except for land leases related to investment property and investment property under development measured at fair value because the land leases form an integral part of these properties.
5. OPERATING SEGMENTS
The Group has 5 reportable segments, as described below, which are the Group's strategic business units. The following summary describes the operation in each of the Group's reportable segments:
· Development Projects - Residential projects: Include construction and selling of residential properties. Commercial projects: Include construction of property for future lease.
· Asset Management: Includes the operation of investment property for lease.
· Hotel Operation: Includes the operation of Hotels.
· Land bank: Includes the investment and holding of property for future development.
· Other: Includes the management services provided for the projects; marketing agent services provided to third party residential properties developers; purchase and sale of the residential properties being developed by third parties.
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. Inter-segment pricing is determined on an arm's length basis.
| Development projects | Asset management | Hotel Operation | Land bank | Other | Total | |||||||||
| Commercial projects | Residential projects | |||||||||||||
| 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | 30/6/19 | 30/6/18 | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| External revenues | 945 | - | 116,683 | 78,759 | 47,254 | 45,601 | 14,854 | 16,076 | 79 | 1,026 | 1,467 | 3 | 181,282 | 141,465 |
| Inter-segment revenue | 34 | - | - | 1 | 2,899 | 2,714 | 2 | 3 | 5 | 15 | 4,365 | 4,386 | 7,305 | 7,119 |
| Segment profit/(loss) before tax | (11,256) | - | 48,375 | 27,162 | 35,067 | 60,298 | 6,737 | 3,649 | (4,733) | 8,350 | (3,468) | (2,780) | 70,722 | 96,679 |
| 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | 30/6/19 | 31/12/18 | |
| US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Segment assets | 125,136 | 118,219 | 413,953 | 359,133 | 697,100 | 758,359 | 75,259 | 69,577 | 54,358 | 52,839 | 17,599 | 885 | 1,383,405 | 1,359,012 |
| Segment liabilities | - | 453 | 100,233 | 96,405 | 473,338 | 520,871 | 11,942 | 52,811 | 653 | 990 | 16,389 | 978 | 602,555 | 672,508 |
Reconciliation of reportable segment profit or loss
| 1/1/19- 30/6/19 |
1/1/18- 30/6/18 |
|
| US$ '000 | US$ '000 | |
| Total profit before tax for reportable segments | 70,722 | 96,679 |
| Unallocated amounts: | ||
| Other profit or loss | (5,169) | (196) |
| Profit before tax | 65,553 | 96,483 |
Reconciliation of reportable segment revenue
| 1/1/19- 30/6/19 |
1/1/18- 30/6/18 |
|
| US$ '000 | US$ '000 | |
| Total revenue for reportable segments | 181,282 | 141,465 |
| Unallocated revenue: | ||
| Non-core activity revenue | 670 | 556 |
| Revenue | 181,952 | 142,021 |
6. REVENUE
The Group's operations and main revenue streams are those described in the last annual financial statements, except for additional revenue from marketing agent services provided to a third party residential property developer which is included in line non-core activity revenue. The Group's revenue is derived from contracts with customers, except for investment property rental income. Primary geographic market is Russia for all the revenue streams.
| For the six months ended |
For the six months ended |
|
| 30/6/19 | 30/6/18 | |
| US$ '000 | US$ '000 | |
| Revenue from contracts with customers: | ||
| Revenue from sale of trading properties - transferred at a point in time | 4,284 | 3,974 |
| Revenue from sale of trading properties - transferred over time | 112,347 | 74,751 |
| Hotel operation income | 14,854 | 16,076 |
| Non-core activity revenue | 1,823 | 556 |
| Construction consulting/management fees | 313 | 3 |
| 133,621 | 95,360 | |
| Other revenue: | ||
| Investment property rental income | 48,331 | 46,661 |
| 181,952 | 142,021 |
7. ADMINISTRATIVE EXPENSES
| For the six months ended |
For the six months ended |
|
| 30/6/19 | 30/6/18 | |
| US$ '000 | US$ '000 | |
| Consultancy fees | 247 | 217 |
| Legal fees | 383 | 814 |
| Auditors' remuneration | 149 | 212 |
| Valuation expenses | 31 | 33 |
| Directors' remuneration | 101 | 658 |
| Depreciation | 68 | 54 |
| Insurance | 71 | 76 |
| Provision for Doubtful Debts | 223 | (292) |
| Donations | 29 | 5 |
| Other administrative expense | 732 | 799 |
| 2,034 | 2,576 |
8. OPERATING EXPENSES
| For the six months ended |
For the six months ended |
|
| 30/6/19 | 30/6/18 | |
| US$ '000 | US$ '000 | |
| Maintenance, utility and security expenses | 9,827 | 10,444 |
| Agency and brokerage fees | 640 | 1,234 |
| Advertising expenses | 2,687 | 3,709 |
| Salaries and wages | 7,740 | 7,542 |
| Consultancy fees | 1,296 | 1,269 |
| Depreciation | 419 | 408 |
| Insurance | 206 | 216 |
| Rent | 797 | 665 |
| Property and other taxes | 4,949 | 4,897 |
| Other operating expenses | 37 | 37 |
| 28,598 | 30,421 |
9. FINANCE COST AND FINANCE INCOME
| For the six months ended |
For the six months ended |
|
| 30/6/19 | 30/6/18 | |
| US$ '000 | US$ '000 | |
| Interest income | 1,730 | 756 |
| Net foreign exchange gain | 8,665 | 16,609 |
| Net change in fair value of financial assets | 2,665 | - |
| Finance income | 13,060 | 17,365 |
| Interest expense on loans and borrowings | (13,340) | (16,773) |
| Significant finance component on advances from customers* | (5,874) | - |
| Net change in fair value of financial assets | - | (1,537) |
| Other finance costs | (918) | (902) |
| Finance costs | (20,132) | (19,212) |
| Net finance cost | (7,072) | (1,847) |
* In the current period the Group presented significant financial component from contracts with customers in the amount of US$5,874 in the finance cost. In prior period significant finance component expense was capitalised in the trading properties under development and was then transferred to cost of sales in the period it was accrued as costs to fulfil the contract. Please refer to note 3 for further explanations.
10. tAX EXPENSE
| For the six months ended |
For the six months ended |
||
| 30/6/19 | 30/6/18 | ||
| US$ '000 | US$ '000 | ||
| Current tax expense | |||
| Current year | 11,055 | 4,099 | |
| Deferred tax expense | |||
| Origination and reversal of temporary differences | 16,912 | 15,716 | |
| Total income tax expense | 27,967 | 19,815 | |
11. INVESTMENT PROPERTY
Reconciliation of carrying amount
| 30/6/19 | 31/12/18 | ||
| US$ '000 | US$ '000 | ||
| Balance 1 January | 742,590 | 818,060 | |
| Renovations/additional cost | 227 | 793 | |
| Disposals | (57,430) | (812) | |
| Fair value adjustment | (15,026) | (3,707) | |
| Effect of movement in foreign exchange rates | 34,779 | (70,668) | |
| Reclassification to trading properties under construction (note 15) | - | (1,076) | |
| Balance 30 June / 31 December | 705,140 | 742,590 |
The disposal during the first half of 2019 represents the sale of the last remaining office building of the Aquamarine III Business Centre owned by Krown Investments LLC to one of the leading Russian banks for a total consideration of 4.4 billion Russian roubles, equivalent to US$68.7 million, net of applicable VAT, realising a profit before tax of US$10,220 thousand.
The increase due to the effect of the foreign exchange fluctuation is a result of the Rouble strengthening compared to the US Dollar by 9% during the first half of 2019. The investment property was revalued by independent appraisers on 30 June 2019. The fair value adjustment above is presented net of the foreign exchange effect.
12. INVESTMENT PROPERTY UNDER DEVELOPMENT
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January | 141,880 | 163,240 |
| Construction costs | 9,261 | 5,691 |
| Fair value adjustment | (15,361) | (7,787) |
| Effect of movements in foreign exchange rates | 10,060 | (19,264) |
| Balance 30 June / 31 December | 145,840 | 141,880 |
The increase due to the effect of the foreign exchange fluctuation is a result of the Rouble strengthening compared to the US Dollar by 9% during the first half of 2019. The investment property under development was revalued by independent appraisers on 30 June 2019. The fair value adjustment above is presented net of the foreign exchange effect.
The increase in the construction costs is due to the commencement of active construction of the projects Plaza 1C and Plaza IV.
13. PROPERTY, PLANT AND EQUIPMENT
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January | 67,868 | 77,633 |
| Additions | 728 | 1,596 |
| Depreciation for the period / year | (487) | (899) |
| Disposals | (77) | (150) |
| Effect of movements in foreign exchange rates | 4,943 | (10,312) |
| Balance 30 June / 31 December | 72,975 | 67,868 |
14. TRADING PROPERTIES
| 30/6/19 | 1/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January | 19,082 | 10,792 |
| Transfer from trading properties under construction (note 15) | - | 23,054 |
| Additions | - | 56 |
| Cost of trading properties sold | (3,638) | (11,681) |
| Effect of movements in exchange rates | 1,727 | (3,139) |
| Balance 30 June / 31 December | 17,171 | 19,082 |
Trading properties comprise unsold apartments and parking spaces. The transfer from trading properties under construction during 2018 represents the completion of the construction of a number of apartments, offices and parking places of AFI Residence Paveletskaya project.
The amount recognised to cost of sales of trading properties represents the sale of completed apartments, parking places and commercial premises recognised at a point in time. This amounts represent the amount transferred to the income statements upon transferring of the rights to the buyers according to the signed acts of transfer.
15. TRADING PROPERTIES UNDER CONSTRUCTION
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January as previously reported | 278,800 | 349,735 |
| Effect of adoption of IFRS 15 as at 1 January 2018* | - | (59,801) |
| Restated balance at 1 January | 278,800 | 289,934 |
| Transfer from investment property (note 11) | - | 1,076 |
| Transfer to trading properties (note 14) | - | (23,054) |
| Construction costs | 64,946 | 159,186 |
| Finance cost capitalised** | - | 9,414 |
| Cost of trading properties sold | (61,355) | (124,804) |
| Partial reversal of write-down of prior years | 5,676 | - |
| Effect of movements in exchange rates | 18,935 | (32,952) |
| Balance 30 June / 31 December | 307,002 | 278,800 |
Trading properties under construction comprise "Odinburg", "AFI Residence Paveletskaya" Phase II and III, "Botanic Garden" and "Bolshaya Pochtovaya" projects which involve primarily the construction of residential properties. The incurred cost to fulfil signed DDU (share participation agreement) contracts as at period/year end were recognised in cost of sales in the income statement.
The properties are measured at the lower of cost and net realisable value. The internal assessment is carried out at each reporting date to test whether the cost shall be written down to net realisable value. No write down loss was recognised in 2018 and at 30 June 2019. On 30 June 2019, the Group has recognised a partial reversal of the prior year's write down of the "Odinburg" project based on the internal assessment of the project's net realisable value. As a result an amount of US$5,676 was recognised in profit or loss as reduction of cost of sales.
*The Group has initially adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018.
** In the current period the Group presented significant financial component on advances from customers in the amount of US$5,874 in the finance cost. In prior period significant finance component expense was capitalised in the trading properties under development and was then transferred to cost of sales in the period it was accrued as costs to fulfil the contract. Please refer to note 3 for further explanations.
16. TRADE AND OTHER RECEIVABLES
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Short-term trade and other receivables: | ||
| Advances to builders | 32,857 | 35,919 |
| Amounts receivable from related parties (note 25) | 116 | 184 |
| Trade receivables, net | 8,019 | 5,008 |
| Receivables from contracts with customers | 4,360 | - |
| Other receivables | 6,322 | 5,603 |
| VAT recoverable | 9,808 | 5,806 |
| Tax receivables | 1,976 | 2,100 |
| Balance 30 June / 31 December | 63,458 | 54,620 |
| Long-term trade and other receivables: | ||
| Prepayments | 1,194 | - |
Trade receivables net
Trade receivables are presented net of an accumulated provision for doubtful debts and unrecognised revenue of US$6,729 thousand (31/12/2018: US$7,686 thousand).
Receivables from contracts with customers represent receivables from customers for residential units sold were the revenue recognised over time is higher than the amount paid by customers, up to the reporting date.
Long-term prepayments represent prepaid amount to a third party developer to construct and transfer to the Group a non-residential building.
17. CASH AND CASH EQUIVALENTS
| 30/6/19 | 31/12/18 | |
| Cash and cash equivalents consist of: | US$ '000 | US$ '000 |
| Cash at banks | 89,807 | 88,798 |
| Cash in hand | 310 | 205 |
| 90,117 | 89,003 |
18. OTHER INVESTMENTS
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Equity securities | 5,335 | 5,244 |
| Investment in listed debt securities | - | 2,022 |
| Investment in funds | 9,002 | 9,146 |
| 14,337 | 16,412 |
Reconciliation from opening to closing balances:
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January | 16,412 | 10,515 |
| Coupon interest accrued | 6 | 209 |
| Interest received | (28) | (145) |
| Additions | - | 20,995 |
| Disposal of investment in mutual fund | (2,180) | - |
| Disposals/redemption of bonds | (2,000) | (12,997) |
| Fair value gain/(loss) | 2,127 | (2,165) |
| Balance 30 June / 31 December | 14,337 | 16,412 |
As 30 June 2019, the Group holds portfolio of investments comprising investment in mutual funds and private equity securities, which are classified as financial assets at fair value through profit or loss based on the Group's business model. Refer to note 22 for further information on fair values.
The fair value gain or loss on other investments are presented in net finance income or cost in the statement of profit or loss.
19. SHARE CAPITAL AND RESERVES
| 30/6/19 | 31/12/18 | |
| 1. Share capital | US$ '000 | US$ '000 |
| Authorised | ||
| 2,000,000,000 shares of US$0.001 each | 2,000 | 2,000 |
| Issued and fully paid | ||
| 523,847,027 A shares of US$0.001 each 523,847,027 B shares of US$0.001 each |
524 524 |
524 524 |
| 1,048 | 1,048 | |
2. Translation reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign exchange differences on loans designated as loans to an investee company which are accounted for as part of the investor's investment (IAS21.15) as their repayment is not planned or likely to occur in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve.
3. Retained earnings
Retained earnings are available for distribution at each reporting date. No dividends were proposed, declared or paid during the six-month period ended 30 June 2019.
4. Capital reserve
Represents the effect of the acquisition, in 2015, of the 10% non-controlling interests in Bioka Investments Ltd and its subsidiary Nordservice LLC previously held at 90% and the effect of the acquisitions during the period of the 5% non-controlling interests in Beslaville Management Limited and its subsidiary Zheldoruslugi LLC previously held at 95% and of the 26% non-controlling interest in Bizar LLC previously held at 74%.
20. LOANS AND BORROWINGS
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Non-current liabilities | ||
| Secured bank loans | 384,010 | 487,348 |
| Current liabilities | ||
| Secured bank loans | 16,407 | 16,176 |
| Unsecured loans from other non-related companies | 284 | 257 |
| 16,691 | 16,433 |
The outstanding loans at 30 June 2019 were as follows:
1) A secured loan from VTB Bank JSC («VTB») acquired by one of the Group's subsidiaries, Bellgate Constructions Ltd («Bellgate»), based on a loan agreement signed on the 28 December 2017. This loan was used to refinance the previous loan and Ozerkovskaya III loan from VTB. Bellgate received the loan in five tranches, during January and February 2018, in Euros and Russian Rubles. The blended interest rate on the loan is circa 5.7% per annum (assuming EUR/RUR exchange rate and Russian Central Bank key lending rate as at 30.06.2019). The interest and the principal of the loan are to be paid quarterly, while the term of the loan is 5 years. In June 2019 Bellgate made a partial early repayment of the loan of EUR60 million (equivalent to US$68 million).
2) Secured loans from VTB acquired by Group's subsidiaries, Sanatorium Plaza Kislovodsk and Sanatorium PlazaSPA Zheleznovodsk (Sanatoriums), based on loan agreements signed on the 12 October 2018. The loans were used to refinance the previous loans of Sanatoriums from VTB (which were received to finance the acquisition of the additional 50% stake in the Sanatorium Plaza Kislovodsk and to repay intra group loans). Sanatoriums received the loans in Euros. The interest rate on the loans is 4.2% per annum. The interest and the principal of the loans are to be paid quarterly with a balloon payment of circa 60% at maturity, while the terms of the loans are up to 4 years. In May 2019 the Group made a partial early repayment of the loan of EUR35 million (equivalent to US$39 million).
The financial covenants in the loan agreements remained the same as described in the last annual consolidated financial statements. The Group has complied with the loan covenants during six months ended 30 June 2019.
21. TRADE AND OTHER PAYABLES
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Trade payables | 23,110 | 10,742 |
| Payables to related parties (note 25) | 404 | 192 |
| Amount payable to builders | 27,062 | 18,056 |
| VAT and other taxes payable | 5,576 | 4,800 |
| Other payables | 6,450 | 3,588 |
| 62,602 | 37,378 | |
The increase in the trade payables since 2018 year-end is mainly due to the recognition of a financial liability by one of the Group's Russian subsidiaries, AFI RUS Management LLC in the amount of 910 million Russian rubles (equivalent to US$14.4 million) based on an irrevocable contract with a third party developer to acquire a number of apartments as described further in this note. At the same time, the Group has recognised a non-financial asset in its balance sheet of the same amount representing a right to acquire these apartments.
Irrevocable contract to acquire a number of apartments:
A number of Group's subsidiaries provide construction management and marketing services to Metromash JSC ("Metromash") for the development of "Sirenevy Park" residential project in Moscow. As part of the marketing process, one of the Group's subsidiaries, AFI RUS Management concluded an irrevocable "DDU" agreement (contract of participation in construction) with Metromash. Date of state registration of the agreement is 27 June 2019. In accordance with this agreement, Metromash has an obligation to transfer 120 apartments not later than 31 December 2021 to AFI RUS Management, on account of future sales. AFI RUS Management has an obligation to pay full consideration in the amount of 910 million rubles during one year from the date of state registration. The apartments will be marketed together with other apartments of Metromash, while AFI RUS Management will pay to Metromash as the apartments are pre-sold to end-customers.
As at 30 June 2019 no payments were made by AFI RUS Management to Metromash and no apartments were sold by AFI RUS Management to customers.
22. FINANCIAL INSTRUMENTS
A. Accounting classifications and fair values
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels and the fair value hierarchy for financial instruments measured at fair value. 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 | |||||||
| Financial assets at amortised cost |
Mandatory at FVTPL - others | Other financial liabilities | Total | Level 1 | Level 2 | Level 3 | Total | |
| 30 June 2019 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 |
| Financial assets measured at fair value | ||||||||
| Investment in equity securities | - | 5,335 | - | 5,335 | - | - | 5,335 | 5,335 |
| Investment in fund | - | 9,002 | - | 9,002 | - | - | 9,002 | 9,002 |
| 14,336 | 14,336 | |||||||
| Financial assets not measured at fair value | ||||||||
| Loans receivable | 680 | - | - | 680 | ||||
| Trade and other receivables | 18,815 | - | - | 18,815 | ||||
| Cash and cash equivalents | 90,117 | - | - | 90,117 | ||||
| 109,612 | - | - | 109,612 | |||||
| Financial liabilities not measured at fair value | ||||||||
| Interest bearing loans and borrowings | - | - | (400,701) | (400,701) | - | - | (402,252) | (402,252) |
| Trade and other payables | - | - | (48,346) | (48,346) | ||||
| (449,047) | (449,047) | |||||||
| Carrying amount | Fair value | ||||||||
| Financial assets at amortised cost |
Mandatory at FVTPL - others | Other financial liabilities | Total | Level 1 | Level 2 | Level 3 | Total | ||
| 31 December 2018 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
| Financial assets measured at fair value | |||||||||
| Investment in equity securities | - | 5,244 | - | 5,244 | - | - | 5,244 | 5,244 | |
| Investment in fund | - | 9,146 | - | 9,146 | - | - | 9,146 | 9,146 | |
| Investment in listed debt securities | - | 2,022 | - | 2,022 | 2,022 | - | - | 2,022 | |
| - | 16,412 | - | 16,412 | ||||||
| Financial assets not measured at fair value | |||||||||
| Loans receivable | 3,389 | - | - | 3,389 | |||||
| Trade and other receivables | 10,832 | - | - | 10,832 | |||||
| Cash and cash equivalents | 89,003 | - | - | 89,003 | |||||
| 103,224 | - | - | 103,224 | ||||||
| Financial liabilities not measured at fair value | |||||||||
| Interest bearing loans and borrowings | - | - | (503,781) | (503,781) | - | - | (506,854) | (506,854) | |
| Trade and other payables | - | - | (22,334) | (22,334) | |||||
| - | - | (526,115) | (526,115) | ||||||
B. Measurement of fair values
Valuation technics and significant unobservable inputs
The following table shows the valuation techniques used in measuring Level 3 fair values at 30 June 2019 and 31 December 2018 for financial instruments measured in fair value in the statement of financial positions, as well as the significant unobservable inputs used.
| Type | Valuation technique | Significant unobservable inputs | Inter-relationship between key unobservable inputs and fair value measurement |
| Investment in fund | The securities and other assets of each Segregated Portfolio are valued by the Fund based on market quotations. If market quotations are not readily available, or if the Investment manager determines that special circumstances exist which effect the value of a security, the valuation of those securities and other assets will be determined in good faith by the Investment manager, whose determination will be final, conclusive and binding on all parties. | Not applicable | Not applicable |
23. ADVANCES FROM CUSTOMERS
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Balance 1 January as previously reported | 65,407 | 123,766 |
| Effect of adoption of IFRS 15 as at 1 January 2018* | - | (77,877) |
| Restated balance at 1 January | 65,407 | 45,889 |
| Customer advances during period/year | 86,771 | 174,514 |
| Effect of recognition of revenue | (105,990) | (144,204) |
| Effect of movements in exchange rates | 5,786 | (10,792) |
| Balance 30 June / 31 December | 51,974 | 65,407 |
*The Group has initially adopted IFRS 15 Revenue from Contracts with Customers as from 1 January 2018.
24. FINANCIAL RISK MANAGEMENT
The Group's financial risk management objectives and policies are consistent with that disclosed in the consolidated financial statements as at and for the year ended 31 December 2018.
Russian business and economic environment
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.
Elevated geopolitical tensions and difficult external financial conditions continue to impose risks of further 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. Despite a moderate growth in the first half of the year and forecasted overall growth of 1.2% in 2019, expansion of economic sanctions still poses key risks to medium-term growth.
Legislative changes in relation to residential construction and sales mean that, from July 2019, developers of all projects under construction can only pre-sell apartments using escrow schemes. Escrow schemes mean that all proceeds received from customers who are buying residential units during construction should be kept in an escrow account and cannot be used by the developers to finance the ongoing construction. Under the new legislation, the money in the escrow account can only be released to the developer when construction is completed and residential units are delivered to customers. Client funds so far received by developers under the share participation agreements ("DDU"), which have been traditionally used to finance construction, need to be replaced with external project financing from banks and own equity financing.
In June 2019 the Russian Government defined the projects completed by not less than 30% (calculated of the total project construction budget) with a number of signed share participation agreements not less than 10%, will be exempt from the escrow scheme conditions under which certain projects currently under construction can continue to use the previous financing scheme. Changes to the financing of residential development projects, a transition from client funds financing to project financing, and the corresponding increase in equity share required to finance the projects will have a significant effect on projects' cash flows and increase projects' costs. As a result, market participants expect an upward pressure to be placed on primary market prices.
The interim 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.
25. RELATED PARTIES
| 30/6/19 | 31/12/18 | |
| (i) Outstanding balances with related parties | US$ '000 | US$ '000 |
| Assets | ||
| Amounts receivable from other related companies (note 16) | 116 | 184 |
| Secured loan receivable from related company | - | 1,163 |
The loan receivable from related company was secured by personal guarantee of the controlling ultimate beneficial owner, whereby the guarantor undertakes to pay on demand all the amounts due under the respective loan agreement in case of the borrower's default. On 12 April 2019, the Group received full repayment of the secured loan from related company
| 30/6/19 | 31/12/18 | |
| US$ '000 | US$ '000 | |
| Liabilities | ||
| Amounts payable to other related companies (note 21) | 217 | 156 |
| Amounts payable to ultimate beneficial owner | 135 | - |
| Amounts payable to directors | 50 | 32 |
| Deferred income from related company | 25 | 66 |
| (ii) Transactions with the key management personnel | 1/1/19- 30/6/19 |
1/1/18- 30/6/18 |
| US$ '000 | US$ '000 | |
| Key management personnel compensation comprised: Short-term employee benefits |
1,113 | 787 |
| Short-term directors' benefits | 101 | 658 |
| 1,214 | 1,445 |
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.
| (iii) Other related party transactions | 1/1/19- 30/6/19 |
1/1/18- 30/6/18 |
| US$ '000 | US$ '000 | |
| Revenue | ||
| Related companies - rental income | 127 | 166 |
| Related companies - interest income | 17 | - |
26. SUBSEQUENT EVENTS
There were no material events that took place after the six month period and until the date of the approval of these interim financial statements by the Board of Directors on 26 August 2019, which have a bearing on the understanding of these financial statements.
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