Pro Kapital Council approved Consolidated Interim Report for IV Quarter and 12 Months of 2023 (Unaudited)

MANAGEMENT REPORT

CEO summary

In 2023 we have been in line with the Company’s history, by having focus on the main areas of activities in real estate developments in the three Baltics capitals (Tallinn, Riga and Vilnius) and the hotel operations in Bad Kreuznach, Germany.

Real estate development

In Tallinn, the decision taken earlier in the year on starting the construction and sales of Kalaranna 8 last stage, has proven to be the right one. As a reminder, this last and final stage consists of 4 residential buildings with 146 apartments and 4 commercial units. Furthermore, the decision on taking on the construction management in-house has proven to be the right step. The general contractors to this date seem to be suffering from the consequences of pandemic and the war and their pricing is simply not competitive vis-à-vis smaller contractors that we are able to engage directly. To date we have bought out the excavation/retainage works, underground monolithic concrete works and some smaller jobs the consequence of which has resulted in considerable cost savings. In Q4 we continued the concrete works above ground. Aside from some minor contracts pertaining to ventilation and finishes, we signed all the major contracts in regards to the construction, and we can confidently confirm that our in-house project management model will result in significant cost savings.

We have currently sold 52 units out of 146, for a total sold area corresponding to 35,6% of the total inventory. No significant discounts were applied to our price list, making it even more impressive given that sales in Kalaranna represent on average the highest per square meter price ever achieved in Tallinn’s residential market.

Within Kristiine City, we are actively advancing the design and permit procedures for the "Dunte" project located at Tondi Street 53. It is noteworthy that we have secured significant concessions from the State Landmark Preservation Committee. This includes the permission to expand the ground floor windows on the rear side of the facade into floor-to-ceiling openings. This adjustment enables us to craft more spacious residential units, to offer improved sunlight exposure and direct access to small private terraces.

Still in Kristiine City, we started to sign reservation agreements for our new project Uus-Kindrali, where the construction is expected to start in Spring 2024. The initial feedback from prospect buyers has been positive, with 31 reservations out of 91 total units. The reservations are converted into notarised pre-sale agreements starting from January 2024.

In Riga, our sales of the esteemed River Breeze Residence, recipient of the Baltics Prestige Award for its exceptional architecture, persist. Adding to the 9 sales which happened in the first 9 months of 2023, we have concluded 1 sale in Q4. 2023 has been the best year in terms of sales of inventory in River Breeze, and we expect the project to be sold out by end of 2024. Overall, we are witnessing an upward trajectory in the real estate segment in Riga, specifically in connection with our project.

We possess a building permit for the City Oasis residential quarter, comprising of approximately 330 apartments and spanning 32 500 square meters GBA, situated in Tallinas iela—a serene and verdant living environment in the heart of the city. We are poised to commence construction as soon as the market conditions align favourably for this extensive and ambitious undertaking.

In 2019 we completed five buildings in Šaltiniu Namai Attico project in Vilnius with 115 apartments. Today we have only 3 apartments unsold, out of which one is a model unit. During Q2, we finalized the preparatory works for the start of construction the final phase with city villas (43 units) and a residential-commercial building. As of Q4, we have the excavation and piling works ongoing and we have an agreement with the construction project management company that oversees the construction process. The overall construction is planned to be completed by the end of 2025.

In Q4, we also initiated market outreach for the sales, presenting and securing reservations for about 25% of the upscale units within the City Villas project, affirming the demand for premium class units in Vilnius.

Despite the geopolitical situation, Vilnius market is active in the high-end segment, and we look forward to the next stage of our luxury development.

The Company has also expanded its land portfolio in Vilnius, purchasing a school building in Naugarduko street for the price of 6.3 million euros in 2022. The school will be converted into a high-end residential property located on a hill and opening to spectacular Vilnius Old Town views, consisting of ca 50 luxury apartments. An architectural competition was carried out for the purpose. The winning studio has been in the process of designing and carrying out the building permit process with the city and conditionally to this event we plan on starting the renovation works that will transform the building to a high-end residential project by the end of 2025.

Hotel operations

Following two challenging years that significantly impacted the global tourism sector due to the pandemic, there is now a notable resurgence in demand within the hotel industry.

In Bad Kreuznach, we have achieved a significant operational break-even point despite a considerable portion of the rooms being inaccessible to the public during ongoing renovations. A few years back, we successfully refurbished half of the rooms along with some common areas. The remaining room renovations concluded by the end of Q1 2023, resulting in the availability of the entire room inventory (116 units) for sale and we are already witnessing an increase in the Average Daily Rate.

In July 2023, the hotel was awarded a 4-star rating.

During Q3 and Q4, we observed a consistent upward trend with each month's actual performance exceeding the initial budget. We can proudly say that, thanks to the renovation work and the excellent team that takes care of our hotel and guests, our expectations have been exceeded.

Other matters

On 20 September 2023 we have extended the terms of 9.7 million euros of unsecured bonds issue, with an original maturity date of 31 October 2024. The terms have been revised and, in order to motivate the bondholders on the extension, the interest rate has been increased to 9% from the previous agreed rate of 8%. This minimal increase, despite the changed landscape in the financial and bond markets in the past years, shows the great confidence that the market has in the solidity of our Company. The extension applies to 85% of the principal amount, whereas the remaining 15% will be paid back at the original maturity date of 31 October 2024. The extension is structured for 2 years with the possibility of prolonging it for an extra 2 years should the Company deem it necessary to do so.

As of the date of publishing this report, the Company has extended the terms of conditions of the 28.5 million euro secured bond issue. The Company has made in February, 2024 a partial repayment of 8.6 million Euros before the maturity and has extended the balance of the issue of 19.9 million euros until 20 February, 2028. From 21 February 2024 new interest rate for the bonds is 11% p.a. and the Company has the right to make partial or full repayment of the issue at any time without penalty.

OÜ PKE Treasury previously OÜ Ilmarise Kvartal established for real estate development (Ilmarise Kvartal development project in Põhja Tallinn) was restructured due to the completion and delivery of the aforementioned project. Through the restructuring, it was renamed from OÜ Ilmarise Kvartal to OÜ PKE Treasury.

The aim and purpose for such conversion was arising out of the need of AS Pro Kapital Grupp to manage its cashflows more efficiently within the Estonian group. As the core business of the Company is real estate development, it is imperative to accurately manage the equity investments into various projects across the group and OÜ PKE Treasury is specifically tasked with monitoring the development schedules of each project and to arrange for and provide sufficient funds needed by each project. OÜ PKE Treasury holds an office on lease within PKG headquarters and employs a Treasury Manager responsible for the abovementioned tasks.

As we conclude Q4, the real estate sector in the Baltic region has demonstrated commendable resilience throughout the ongoing challenges posed by the global macroeconomic climate and geopolitical unrest, notably stemming from the conflict in Ukraine. Despite these hurdles, there is a measured sense of optimism within our company, underpinned by the region's favourable economic positioning.

Estonia, Latvia, and Lithuania have experienced sustained economic growth, driven by factors such as increased foreign investment, the expansion of the service sector, and a focus on export-oriented manufacturing. The proximity to Northern Europe and EU membership continues to enhance trade and investment opportunities. While Q3 witnessed a slowdown in sales activity attributed to rising Inflation and increased lending rates, the close of the quarter reveals encouraging signs of stabilization.

Acknowledging the challenges posed by the ever-changing global landscape, we are committed to a proactive and adaptive approach. Our confidence in advancing our project portfolio aligns with the region's positive economic indicators. Despite the ongoing supply chain challenges, material costs, and construction-related uncertainties, we remain resilient in our pursuit of meeting market expectations and delivering high-quality properties for the local community.

The Baltic region's economic fundamentals and the gradual alignment of salary increments with inflation rates contribute to a sense of market recovery. As we navigate the dynamic real estate sector, we continue to explore innovative strategies to anticipate future needs. Our commitment to staying ahead of the curve reflects our confidence in the region's potential and our readiness to capitalize on opportunities as they arise in this evolving global panorama.

Edoardo Preatoni
CEO

Key financials

The total revenue of the Company in 2023 was 23 million euros compared to 66 million euros in the reference period. The total revenue of the fourth quarter was 3 million euros compared to 4 million euros in 2022. The real estate sales revenues are recorded at the point of time when legal title is transferred to the buyer. Therefore, the revenues from sales of real estate depend on the construction cycle and the completion of the residential developments. Due to the completion of the Kalaranna Quarter and Kindrali Houses developments in Tallinn in 2022, the majority of apartments were handed over, leading to a decrease in real estate sales revenue in 2023. While we have started the construction of Kalaranna last stage, the construction and delivery of units to clients won’t happen until the end of 2024, when the revenues shall be recorded.

The gross profit for 2023 has decreased by 59% amounting to 7 million euros compared to 17 million euros in 2022. The gross profit in the fourth quarter was 1 million euros compared to 754 thousand euros in comparative period.

The operating result in 2023 was 3 million euros profit comparing to 18 million euros profit during the same period in 2022. The operating result for fourth quarter was 1 million euros profit compared to 6 million euros profit in the fourth quarter of 2022.

The net result for the 2023 was 900 thousand euros loss, comparing to 13 million euros profit in the reference period. The net result of the fourth quarter was 125 thousand euros profit compared to 5 million euros profit in 2022.

Cash generated in operating activities during 2023 was 9 million euros comparing to 18 million euros during the same period in 2022. In the fourth quarter the cash used was 440 thousand euros compared to 2 million euros used in 2022.

Net assets per share on 31 December 2023 totalled to 0.96 euro compared to 0.98 euros on 31 December 2022.

Key performance indicators

   
*debt / equity = total debt / total equity
**return on assets = net profit/loss / total average assets
***return on equity = net profit/loss / total average equity

****net asset value per share = net equity / number of shares

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated interim statement of financial position

Consolidated interim statements of comprehensive income

The full report can be found in the file attached.

Edoardo Preatoni
CEO
+372 614 4920
prokapital@prokapital.ee

Attachment

• PKG_Q4_2023_ENG