Last checked at 24 Jun 2008 07:00
24 June 2008
Fabian Romania Limited
Final results for the year ended 31 December 2007
Fabian Limited ("Fabian", "Fabian Romania" or the "Company"), the AIM quoted dedicated Romanian real estate investor announces its results for the year ended 31 December 2007. The Company's annual report and accounts will be posted to Fabian Romania shareholders shortly.
Highlights
Executed four new investments, amounting to net equity investment over the year of €19.8 million and creating a portfolio of eight projects in Romania. The Company's share of the market value of these investments was €119.7 million at 31 December 2007, before deducting the outstanding non-recourse bank financing of (€54.7 million)
As at 31 December 2007 the Net Asset Value per share, calculated in accordance with the Company's Articles of Association, was €1.700 (2006: €1.356) an increase of 25.4 per cent. over the year
An additional amount of € 8.0 million has been committed to three new developments since the year end, taking the Company's portfolio to approximately 52,400 square metres of commercial property and 151,000 square metres of residential property under development, in addition to 21,239 square metres of existing lettable office spaces.
Jaroslav Kinach, Chairman of the Company, commented:
"These results demonstrate an impressive performance by the Company during its second full year of operation. I am confident the Company will continue its successful investing during the forthcoming year thereby further enhancing the Company's reputation and driving future returns for shareholders."
Mark Holdsworth, Managing Director of Fabian Capital Limited, the Company's investment manager commented:
"2007 was a year of intense activity for the Company. Four acquisitions were announced, which combined with the strong performance of the Company's existing investments, resulted in NAV per share growth of 25.4 per cent.. The credit crunch had a limited impact on the Romanian property market in 2007 and although there has been a more noticeable effect on Romania since the year end, the outlook for the Company, the Romanian property market and Romania in general continues to offer attractive opportunities for 2008 and beyond."
Contacts:
| Fabian Romania Limited | |
| Jaroslav Kinach | Tel: +44 20 7499 9988 |
| Fabian Capital Limited | |
| Mark Holdsworth | Tel: +44 20 7499 9988 |
| Monument PR - Financial Public Relations to Fabian | |
| Toby Moore | Tel: +44 845 355 1178 |
| Deloitte Corporate Finance - Nominated Adviser to Fabian | |
| James Lewis | Tel: +44 20 7936 3000 |
| KBC Peel Hunt - Joint Broker to Fabian | |
| Capel Irwin | Tel: +44 20 7418 8900 |
| Shore Capital Stockbrokers Limited - Joint Broker to Fabian | |
| Dru Danford | Tel: +44 20 7408 4090 |
Chairman's Statement
It gives me great pleasure to present again excellent results for Fabian Romania Limited.
Fabian Romania has once again demonstrated an impressive performance during its second full year of operation. The Company has continued to prove itself as an established and well known investor in the Romanian real estate market and has substantially expanded its footprint beyond the capital region of Bucharest into selective and high growth cities across the country. The Company believes that it is now the leading UK real estate investor in Romania.
As of 31 December 2007 Fabian Romania has invested €92.7 million in eight projects, comprising three co-investment development joint ventures, the New Town and Timisoara residential developments and the Lakeview office development, a forward purchase investment in the Cubic Centre office development and four tenanted office investments, Banu Antonache, Cascades, Baneasa Business Centre and Evo Centre.
The end of year Net Asset Value per share calculated in accordance with the Company's Articles of Association was €1.700 (2006: €1.356) an increase of 25.4 per cent. over last year's results. Under IFRS, NAV per share was €1.304 (2006: €1.189) representing a gain of 9.7 per cent. over the year. As expected, NAV calculations under IFRS differ from the Company's reflecting differences in the treatment of joint ventures and deferred tax.
Fabian Romania has invested and committed most of the the €38 million of net proceeds raised in December 2006 when the Company listed on AIM. The Company's attractive portfolio of offices and residential projects in Bucharest and leading cities throughout Romania provides a strong platform for further strategic investments throughout the country as Romania's economy grows and benefits from EU accession and integration. Indeed, notwithstanding the global economic outlook, we believe that the property market in Romania will continue to provide excellent opportunities arising from compelling supply/demand dynamics.
The Directors are confident that Fabian Romania advised by the Company's Investment Manager, Fabian Capital Limited with its expanded team of experienced professionals, will continue its successful investing during the forthcoming year and deliver quality assets which will further enhance the Company's reputation as well as drive future returns and Net Asset Value.
Jaroslav Kinach
Chairman
Fabian Romania Limited
Investment Manager's Report
To the shareholders of Fabian Romania,
Fabian Romania is a property company investing in a combination of co-investment development projects and fully let modern commercial buildings to provide affordable, modern new build apartments to the country's emerging middle class and Class A office space for sale to property investing institutions and for rental by large foreign multinational and Romanian companies. The Company's aim is capital efficient profitable growth as measured by net asset value per share.
2007 was a year of intense activity for the Company. Fabian Romania started the year with €42.2 million in cash of which €38.1 million represented the net proceeds of the fundraising at the time of the Company's flotation on London's AIM market in the preceding December. As stated in last year's report and accounts and the AIM admission document, the Company's directors stated strategy is to target absolute returns for the Company's shareholders from investments in Romanian property. The Investment Manager has always believed that proposed investments for the Company should only be recommended to the Board if they meet stringent financial return forecasts.
The Investment Manager looked at well over one hundred potential transactions for the company during the year. Possible transactions were both within and outside Bucharest and spread between the main sub-sectors of the market, office, residential development, retail and logistics. From this list, the Group purchased two Class A office buildings, forward purchased a third currently under development and invested in a residential development scheme in the city of Timisoara taking a 50 per cent. stake alongside a development partner.
The effect of this investment activity combined with the strong performance of the Company's existing investments has been growth in NAV per share of 25.4 per cent. during the year. This is satisfactory given the drag effect of having a substantial amount of cash on the balance sheet at the start of the year. Revenue from the company's four office buildings increased 93 per cent. from €1.5 million to €2.9 million. Net profit was €6.1 million (2006: €1.4 million) which included €9.6 million of revaluation gains (2006: €3.6 million). Significant yield compression during the year resulted in the company's valuers, DTZ Echinox ("DTZ"), valuing the office portfolio at an average yield of 7 per cent. at the year end (2006: average yield 7.4 per cent.).
Fabian Romania's portfolio of development projects increased considerably during the year. By 31 December 2007, the Company had a 50 per cent. share in joint ventures developing 110,524 square metres (2006: 72,000 square metres) of residential space in two schemes under development, 49,929 square metres (2006: 23,256 square metres) of office space under development in two schemes and owned 21,239 net lettable square metres (2006: 8,792 net lettable square metres) of Class A office space in four buildings.
Before we set out in detail the Company's investment performance, we provide a brief review of Romania's economic development over the year.
The Economy
The Romanian economy continues to power ahead. GDP growth for 2007 came out at 6 per cent. on top of 7.9 per cent. growth in 2006 and 4.1 per cent. in 2005. The economy has now been continuously expanding at above 4 per cent. per annum since the end of 2000. This represents a remarkable turnaround from the performance in the 1990s when two deep recessions took place in the space of ten years. Such strong GDP growth together with an addressable market which, in population terms, is the size of the Czech Republic and Hungary combined in driving businesses' expansion plans. This is directly reflected in the demand the Company, as a landlord, is seeing for office space. As an example, one of the Company's prospective tenants is factoring in a 45 per cent. increase in their office space requirements over the next five years.
On the back of strong GDP growth, high employment and a benign tax environment, real wages grew by a staggering 21 per cent. in 2007. This comes on the back of a 26 per cent. growth in 2006. This surge in real disposable incomes is having a marked impact on the consumer. Retail sales are strong which are in turn driving retailers' demand for new retail space. In residential, the impact is particularly marked with strong house price inflation to the benefit of developers.
The flip side of such strong GDP growth and rise in net wages has been a consumption boom. Along with the appreciation of the RON against the euro since 2005, this has contributed to a ballooning trade deficit contributing in turn to consensus forecasts for a 14 per cent. current account deficit in 2008. Only half of the deficit is expected to be covered by foreign direct investment, with the balance from portfolio inflows. As a response the Central Bank has increased interest rates to slow both the growth of credit and the overall economy. The currency has also depreciated against the Euro from the level of 3.11 against the euro in May 2007 to 3.62 at 31 May 2008. Since the year end export growth has now recovered to grow at a faster rate than the growth of imports but it is too early to definitely predict the emergence of a positive trend. The absolute level of the current account deficit remains a concern.
The Credit Crunch Impact
The sub-prime lending crisis in the US had a limited impact on the Romanian property market in 2007 but since the year end there has been a more noticeable effect on Romania. This is not because any of the fifteen or so of the mainly Austrian, Greek, Italian or German owned banks conducting property lending in the country have been particularly hit by exposure to sub-prime mortgages per se, but because of the European wide reduction in money market liquidity and the associated rise in Euro denominated interest rates. Banks have sought to pass on their increased costs of funding to borrowers. Financing is therefore still available but at higher costs and with reduced loan to value ("LTV") ratios. According to Jones Lang LaSalle ("JLL"), investment loan margins have increased on average by 40-65 bps and LTV ratios have declined to 65-75 per cent. from 70-80 per cent. since the last half of 2007. Amortisation rates and debt service coverage ratios have remained unchanged. Owing to the Investment Manager's relationship with a number of financial institutions, we believe securing financing for the Company will not prove to be too onerous if the current market conditions persist but it will be at the expense of higher interest rate margins than was the case in the summer of 2007.
In terms of the impact on demand in the country's property market, we have noticed some caution from end buyers of residential apartments after a number of negative articles in the Romanian media concerning the credit crunch. There has also been some impact from the increase in Euro denominated mortgage rates, though given the current very low level of mortgage borrowing in the country, this effect should not be overstated.
The Company has always been conservative in its approach to both financing and development risk and is now benefiting in the current more straightened financial environment. For instance, finance liquidity risk has always been prudently managed by spreading the credit risk to not only different financial institutions but with different and interpolating lengths of credit. The existing loan portfolio incorporates a mix of fixed and floating loans, which is being actively managed to limit any adverse impact on the Company from a sudden deterioration in European interest rates. The company's total debt as at 31 December 2007 stood at €41.2 million. This equates to a modest 35.3 per cent. of the company's end year total assets of €115.8 million. The Company has always maintained a prudent policy of only buying into co-investment development projects if it has the equity finance to see the project through to completion. On current estimates, the Company does not require any additional equity financing from shareholders in order to build out its current development projects.
The Property Market
In the office market, office leasing activity remains high and if anything, has accelerated over the year. Vacancy rates remain below 3 per cent. according to DTZ. In the absence of substantial new supply, office rents jumped 20 per cent. in 2007 according to JLL. Companies continued to seek new office space for expansion and there has been no noticeable change to the high level of occupiers' demand for pre-lets of office space. In terms of investment purchases of office buildings, yields continued to fall over the year culminating in GTC's sale of America House to Ixis at a 5.6 per cent. yield last August, albeit based on below market rents of €19.0 per square metre per month. Headline yields are suspected to have increased to around 6 per cent. or just above since then, though at this stage there have not been any major transactions in the market to support this view.
Some concern has been expressed by market participants as to the forecast level of supply in the office market over the next couple of years. A number of Bucharest based property agencies have forecast for 2007 - 2010 inclusive some 300,000 square metres of new Class A office stock to be supplied into the market in each year. Under such a scenario, and given the city's current total class A stock of just over 900,000 square metres, there is a risk that vacancy levels may increase from the current sub 3 per cent. level to an estimated 5 per cent. level in the coming 12-18 months as noted by JLL.
The anticipated new space that was expected to have been delivered onto the market has for a number of years been consistently overestimated. In 2007, for instance, 300,000 square metres was forecast by a number of property agents to be delivered during the course of the year. However, half of this volume was actually delivered by the year end according to a number of the same agents. This highlights a long term tendency to over optimism upon the part of local agents in respect of how much space developers are physically able to construct in a given year.
This bias to over optimism is exacerbated by the nature of the Romanian office market. Many developments are announced at an early stage to attract interest from tenants and other interested parties. Delays often occur due to lack of construction capacity, land title issues, difficulties over financing and planning, particularly for the less experienced local developers. The Investment Manager believes that between 140,000 square metres and 170,000 square metres of new office space will be delivered onto the market during 2008, against current forecasts by a number of agents of over 300,000 square metres.
The Investment Manager believes that the market will remain undersupplied with office space for the coming 3-5 years as both international and local investors are becoming more cautious or scaling back their plans in the current financial climate. With continued expansion by existing multinationals and new foreign direct investment, the gap between supply and demand will be maintained to the benefit of the landlord developer. In the medium term, the Investment Manager believes that Bucharest can sustain two million square metres of Class A office space in line with the current stock of Budapest, the capital city of a country with less than half the population of Romania.
Construction costs are forecast by Bucharest based cost consultants to increase in 2008, a trend seen throughout Eastern Europe. This will have some impact for developers on returns for new projects especially in weaker locations or where the land is over-priced. The Investment Manager continues to be prudent in selecting projects for consideration by the Company's directors and aims to help the Company mitigate construction cost risks as far as possible by signing fix priced contracts and by keeping current construction companies accountable for contracts signed.
In the residential sector, 2007 was an exceptionally strong year. Although housing data is hard to come by and not always totally reliable, but as an indication of the market, the property agents, Atis Real, have estimated that house prices rose by 20 per cent. during the year on the back of the strong growth in real wages. A number of new schemes were announced in Bucharest by European developers entering the market for the first time. Total forecast supply of new homes in the capital is now forecast to be in the region of 20,000 units over the next three years according to consensus forecasts. This compares to 786,000 existing dwellings in the city at the year end according to the National Institute of Statistics ("NIS"). Consensus estimates for present demand today are 150,000 to 300,000 units and reflect the fact that only 13,623 residential units have been delivered onto the market since 2000, according to the NIS. Demand is also being driven by the increased availability of mortgages as more banks have entered the mortgage market for the first time. The strong growth in real wages has now opened up the large regional cities of Romania as potential cities for residential schemes. The absolute level of wealth, combined with low unemployment and the availability of mortgage finance, means that the emerging middle class are now able to afford new build apartments of 75-100 square metres. The cities of western Romania, benefiting from their proximity to the Hungarian border and being the recipients of considerable foreign direct investment, look particularly attractive.
Strategy
Fabian Romania will continue to focus on co-investment developments in the residential and office sub-sectors of the market. It will continue its successful development strategy acting together with local and international development partners to manage risk and spread investments. The Investment Manager believes opportunities continue to be attractive for the Company in these sub-sectors of the market. A number of promising transactions have been presented to the directors, some of which are at an advanced stage of negotiations. The Timisoara transaction represented the first project for the Company outside Bucharest and has marked the start of a greater focus going forward for the Company both on the residential sub-sector and the regional cities. Since the year end, a joint venture with the Hungarian developer, SCD, for two residential schemes in Oradea and Satu Mare demonstrates a further development of this strategy.
Since the latter part of 2007, there has been anecdotal evidence that some property investors, whose investment strategy involved high levels of gearing, have stepped back from transactions at the more speculative end of the office investment market. In addition, some overseas developers seeking to enter Romania or add to existing land holdings have either decided not to enter the market or to become more cautious in the size of schemes they are seeking to develop. The Investment Manager believes this may be somewhat beneficial to the Company. As Romania continues to develop, it is not in the Company's interest for the property market to move from boom to bust but rather to exhibit a steadier rate of growth. If some of the more ambitious plans by foreign developers have been scaled back or cancelled, this is much to the benefit of the existing players in the Romanian property market such as Fabian Romania.
Investors and developers with less strong relationships with banks are finding it more difficult to attain competitive financing or financing at all. In some cases, this is likely to ensure an increased supply of relatively inexpensive buildings where the owners are having financing difficulties. Fabian Romania will seek to take advantage of such opportunities as they arise, particularly in light of the on-going strength of the office rental market and the Investment Manager's experience in this sub-sector.
To date, the Company has not purchased any assets in the retail or logistics markets. Retail developers have been aggressive in expansion plans to the extent that a number of regional cities now have up to four shopping centre schemes on the drawing board all due to compete with each other. For fully let centres, the current shortage has meant high rents which the Investment Manager believes may fall as new supply of retail space comes onto the market
The Company has not, as yet, acquired any co-investment development projects in the logistics sub-sector but is looking to do so if the right opportunity presents itself. The amount of logistics space developed to date in Romania is substantially insufficient for the economy's current needs. A number of potential site acquisitions with prospective high quality development partners are being assessed to give exposure to the logistics sub-sector with attractive forecast returns.
The Investment Manager will continue to assess whether each of the company's assets continues to meet internal rate of return targets on a forward basis. Sale proceeds from the disposal of assets will be recycled for reinvestment in new projects, assuming such acquisitions will deliver suitably attractive returns.
Risk will continue to be prudently managed. On the letting side, the Company has always worked to secure pre-lets with strong tenants at an early stage for all development projects. Construction procurement and costs are secured by not relying on a single construction counterparty and by locking in fixed construction contracts once building consent is achieved. These practices will continue. The Investment Manager will continue to recommend to the Directors that investments be spread into different sub-sectors of the country's property market, between development projects and fully let investment properties and between Bucharest and the regions, thereby ensuring that no unnecessary concentration exists in the spread of the Company's portfolio.
Acquisitions
Pursuant to the above mentioned strategy, the Company made four acquisitions in Romania during the year and subsequent to the year end completed two further acquisitions. The four acquisitions made during the year were:
Baneasa Business Centre office building in North Bucharest;
Evo Centre office building located in Pipera / Voluntari district of North Bucharest;
A 50 per cent. stake alongside Coltex International Investment SRL in the Timisoara project located in North Timisoara; and
An advance payment in the Cubic Centre office building located in the Pipera district of North Bucharest with a commitment to acquire the development on completion from Kendama Limited.
On 7 March 2008 the Company completed the acquisition of the Romana office building development which was announced to the public as a potential acquisition on 14 July 2007. The Romana office project is located on Dacia Boulevard.
On 29 May 2008, the Company formed a 50/50 joint venture with SCD Group, a Hungarian real estate developer, and acquired two sites for development. These developments will comprise the construction of 388 residential apartments in Oradea and 165 residential apartments in Satu Mare. Both cities are located close to the Hungarian border, benefitting from the growth in cross-border trade and investment.
Outlook and Share Price
The Company's current co-investment development projects, with strong development partners, continue to make excellent progress and to set standards in the country in their respective sub-sectors of the property market. 2008 has seen or will see construction start on the Lakeview, Romana and Timisoara schemes and near completion on the Cubic Centre and New Town developments. This will mark a significant step towards the realisation of a substantial part of the future development profit NAV of €2.214 per share. The share price performance since the AIM IPO of Fabian Romania in December 2006 has been disappointing. It is of little consolation that the share price might have outperformed its peer group on AIM over the course of the credit crunch or that in Sterling terms the decline has been much less. We believe the delivery of realised profits from development projects, forecast in 2009, will drive the NAV per share, which we hope will be reflected in the Company's share price.
The Company's portfolio of office buildings is set to continue to benefit from the strength of the office leasing market. A number of attractive acquisition opportunities are currently under consideration. The Investment Manager regards the outlook for the Company, the Romanian property market and Romania in general as continuing to offer attractive opportunities for 2008 and beyond.
Mark Holdsworth
Fabian Capital Limited
23 June 2008
Property Portfolio
Fabian Romania's portfolio comprises:
| Property | Location | Net lettable / sellable area |
| Cascades | Central Bucharest | 4,347 square metres |
| Banu Antonache | North Bucharest | 4,445 square metres |
| Baneasa Business Centre | North Bucharest | 9,799 square metres |
| Evo Centre | North Bucharest | 2,648 square metres |
| Total income producing commercial properties | 21,239 square metres | |
| Lake View* | North Bucharest | 23,256 square metres |
| Cubic Centre ** | North Bucharest | 26,673 square metres |
| Romana *** | Central Bucharest | 2,480 square metres |
| Total commercial properties under development | 52,409 square metres | |
| Total commercial | 73,648 square metres | |
| New Town* | East Bucharest | 72,000 square metres |
| Timisoara* | Timisoara | 38,524 square metres |
| Oradea *** | Oradea | 33,862 square metres |
| Satu Mare *** | Satu Mare | 6,700 square metres |
| Total residential properties under development | 151,086 square metres |
* 50 per cent. holding in joint venture.
** Advance payment of the acquisition price payable at completion.
*** Represent post year end acquisitions
Cascades
Cascades is a high quality office building in a prime location. It was completed in October 2004 and comprises 4,347 square metres of lettable space with 24 underground car parking spaces. The building is fully let to an excellent set of tenants, namely Pro Credit Bank (backed by the IFC and the German Government), Aviva PLC, SC Rompetrol, HBO Romania and the Taiwan Trade Delegation. It is located just off Victoria Square in the heart of the City's new central business district.
The Company signed a share purchase agreement to purchase the Cascades office building in November 2005. The transaction was successfully closed in April 2006. The price paid by the Company was €12.2 million, giving a headline yield of 8.7 per cent..
When the Company originally negotiated the share purchase agreement in November 2005, Buzesti Street was very much the emerging business district of the city. As the city has continued to expand to the north since 2005, Buzesti Street's relative location in the city has correspondingly continued to rise in prominence. We expect Cascades to continue to perform well in 2008.
DTZ valued Cascades at €18.5 million at 31 December 2007 representing a gain of €3.9 million or 27 per cent. over the prior year valuation of €14.6 million. On the original equity investment of €2.6 million, post debt drawdown, the return on the Company's equity invested in Cascades has now grown to 242 per cent. since acquisition in April 2006.
The growth in value has come mainly from DTZ's view that this building is 'under-rented' compared to the average achievable office rents in the market for a similar quality and located building if it was being leased out today. The opportunity exists for the Company to improve the rental income of the building.
Banu Antonache
The Company acquired Banu Antonache in December 2005 from the developer with just one tenant in place. During 2007, Fabian Capital successfully leased the building to a selection of multinational tenants. As with Cascades, all leases are set in euro's, indexed to Eurozone CPI and are set for five years.
The Banu Antonache investment has also shown growth. The value by year end, according to DTZ, amounted to €17.7 million, a gain of €3.1 million over the year or 21 per cent.. On the original invested equity of €3.4 million, the return on the company's equity has grown to 158 per cent. since acquisition in December 2005.
Banu Antonache has seen growth in its value over the year which has again been principally derived from DTZ's view that Banu Antonache, similarly to Cascades is 'under-rented' compared to the average achievable office rents in the market for a similar quality and located building if it was being leased out today.
Baneasa Business Centre
On 18 June 2007, Fabian Romania acquired the Baneasa Business Centre office building from the Austrian developer Immoconsult Leasinggesellschaft G.M.B.H. for a total transaction value of €23.9 million. The building was valued by DTZ at €29.5 million at 31 December 2007 representing a satisfactory gain of 23 per cent. over the purchase price agreed in late 2006.
The building is a Class A office building located in the rapidly emerging office district of North Bucharest comprising a net lettable area of 9,799 square metres. The building hosts a range of multinational tenants including Wrigley, Colgate, Fresenius, Cargill and Volksbank thereby meeting the targeted tenant profile of Fabian Romania. At acquisition the average lease length was around three years with a variety of reversionary leases at rents between €12 per square metres /month to €16 per square metres/month.
The acquisition gave Fabian Romania further exposure to a high quality office building located in the heart of the emerging business district of North Bucharest. We believe there is rising demand for space by both existing multinational tenants seeking to expand and new multinational tenants entering Romania. We are confident that as leases come up for renewal, upward revisions in rents per square metre per month are achievable.
In July 2007, Fabian Romania increased the total borrowings secured against the building to circa. €19.7 million. This has resulted in net equity invested by the company of approximately €4.2 million pre revaluation. With a gain of €5.6 million since acquisition, the Company has achieved a pleasing pro forma return on equity invested of 133 per cent. by the year end.
Evo Centre
On 21 November 2007, Fabian acquired the Evo Centre office building from its developers, the Adama Group of Israel for a total purchase price of €5.16 million. In December, the company drew down on an investment loan from Investkredit Bank AG for €3.68 million resulting in net equity post drawdown of €1.48 million.
The building comprises 2,648 square metres of net lettable office and retail space and is 52 per cent. let to Adama. The building is located in a predominately residential area just north of the major development area of Pipera. By agreeing to purchase the building empty, the company took on the 'letting risk' enabling it to acquire the building at a more advantageous price. This transaction was very similar to the manner in which the company had previously purchased the Banu Antonache building, also unlet, from a developer.
The building was valued at €6.07 million by DTZ at 31 December 2007 representing an uplift of €0.91 million or 18 per cent. from the purchase price in the 1.5 months Fabian had owned the building. On actual equity invested by Fabian of €1.49 million, the gain equates to a 61 per cent. return.
Lakeview
In September 2006, the Company acquired its first office co-development project in Bucharest. The development involves the construction of a Class A office building of 23,256 square metres net lettable area above ground. AIG/Lincoln the European real estate development arm of the joint venture between AIG and Lincoln Properties, both of the United States is acting as developer on the project. The site came with outline planning consent (PUZ) but required detailed planning (PUD) and construction consents from local planners.
During the third quarter of 2006, extensive work was undertaken by AIG/Lincoln to prepare the site for the start of construction. Construction started on site during the second quarter of 2007.
Detailed negotiations have been conducted to pre-let the majority of the building to a small number of multi-national tenants. This has been successfully concluded post the year end, 90 per cent. of the building's space has been let to multinational tenants with the remaining 10 per cent. subject to offers in hand.
DTZ have given a land valuation, as at 31 December 2007, of €8.8 million for the 50 per cent. share owned by Fabian. Adding work in progress of €1.97 million, the total value of the company's 50 per cent. share of the investment stood at €10.8 million. This has been financed by €2.43 million of equity and bank debt drawn down from MKB Bank of €5.64 million. The resultant gain of €2.73 million equates to a satisfactory 112 per cent. return to date on the company's invested equity of €2.43 million.
The forecast gross development value of the scheme, according to DTZ, is €71.8 million at 31 December 2007. This is based on forecast office rents of €15 per square metres per month. After deducting forecast development costs, DTZ's forecast implies future development profits for the company amounting to €8.9 million or some €0.18 per share. The Company currently forecasts project completion to be achieved by the end of 2009.
Cubic Centre
On 30 April 2007, Fabian Romania announced that it had entered into an agreement to purchase at practical completion the Cubic Centre office building in the Pipera district of North Bucharest. The building will be a Class A office building with a gross area of approximately 44,000 square metres. The building is being developed by Kendama, an experienced local developer in Romania. Construction is now well under way and is proceeding according to plan and to budget. The developer estimates practical completion to be achieved during the second quarter of 2009.
Upon completion, the building will provide a net lettable office area of 26,673 square metres over 12 floors, together with 533 car parking spaces. The building is located in a prominent location in the Pipera district and is likely to attract international tenants seeking Class A office space.
Fabian Romania paid the first instalment of €12.25 million after the developer secured full construction finance and building consent. The €12.25 million initial investment towards the anticipated purchase price is expected to be the total equity requirement for Fabian. At practical completion of the building by the developer, the Company will pay the final instalment based upon a forward purchase yield of 7.4 per cent. - 7.8 per cent. applied to rents achieved. Based upon current rental estimates, the total value of the transaction is estimated to be approximately €60 million. The total equity requirement for the Company is estimated to be €12 million.
The agreement to forward purchase the Cubic Centre office building gives the Company exposure to an Class A office building in the Pipera district of the Bucharest secured at an attractive yield. Kendama is responsible for finding tenants, managing the general contractor and financing the project thereby ensuring the Company is not taking development risk.
DTZ, has estimated the future value of the Cubic Centre at €64.8 million based on a yield of 7.15 per cent. as at 31 December 2007. After deducting the balance of the purchase price still to be paid by the company, DTZ estimates a future developer's profit of €4.4 million to Fabian or €0.09 per share.
New Town
New Town is a scheme of 72,000 square metres above ground involving the construction of 636 apartments over two phases. The Company paid €5.75 million for 50 per cent. of the development and the acquisition was completed in July 2007. Mivan are the joint venture partner in the project as well as the development manager of the scheme through their local subsidiary, Ropotamo SRL. The joint venture development company, Phoenix Park SRL, has agreed a fixed price build contract with Mivan Kier. The scheme was granted final building consent at the start of April 2007. The site is 22,000 square metres in size and situated close to a nearby metro station. The apartments will be in the region of 100 square metres per unit and are targeted at Bucharest's emerging middle income families.
At the time of writing, 274 apartments in the New Town residential scheme had been sold. A full sales launch for New Town commenced in mid July 2007 with the release of the first of six phases, comprising 119 apartments. All apartments in the first release, 121 out of 122 in the second release and 34 out of 75 in the third release have been sold. The first release had an average selling price of €1,299 per square metre, the second release had an average selling price of €1,437 per square metre and the third release is currently selling at an average price of €1,586 per square metre (excluding VAT).
At 31 December 2007 the Company's investment is valued at €20.7 million, financed by €5.75 million of equity and bank debt drawn down from HVB of €5.22 million. The resultant gain of €9.73 million equates to a 169 per cent. return on the company's invested equity of €5.75 million.
DTZ's forecast implies future development profits amounting to €8.1 million or some €0.16 per share. The Company currently forecasts project completion to be achieved by the end of 2009.
Timisoara Residence project
On 25 June 2007, Fabian Romania purchased a 50 per cent. interest in a residential development site to build 595 apartments in Timisoara for €2.35 million. The acquisition is structured through a development company that owns a 1.1 hectare site in north Timisoara. Coltex, the co-shareholder and developer has entered into a partnership agreement with Fabian Romania to complete this residential development. Coltex has a known track record, having developed and sold the successful Banu Antonache office building to Fabian Romania in late 2005.
The acquisition is Fabian Romania's first joint venture residential project outside of Bucharest giving Fabian Romania further exposure to the rising residential sector as well as to Timisoara. The city is Romania's third largest with a population of over 300,000 and is located in the west close to the Hungarian border. The area is the focus of a large amount of foreign direct investment with many international companies entering Romania preferring a base in the west of the country towards Hungary and the rest of the EU. We believe the city has attractive characteristics for the supply of modern residential apartments.
The project is reaching final stages in the architectural process with construction planned to commence on site in the fourth quarter of 2008. The new PUZ lodged with the city planning authorities in the fourth quarter of 2007 for the Timisoara land plot was approved in the first quarter of 2008.
In late 2007, Fabian, in conjunction with its development partner, Coltex, purchased a further 2,320 square metres of land to take the total size of the plot to 13,245 square metres of land. This should allow the joint venture to construct 38,524 square metres of residential space above ground, as approved. The total purchase price for all the plots purchased between June and October 2007 amounted to €6.54 million (of which the Company's share is €3.27 million).
DTZ have forecast future development profits amounting to €4.8 million or some €0.09 per share. The Company currently forecasts project completion to be achieved by the end of quarter one of 2011.
Romana
On 7 March 2008, the Company completed the acquisition of the Romana office project. The Romana office building will be built for Fabian Romania on a centrally located site on Dacia Boulevard and is likely to attract international tenants. The building will be built to Class A specifications with a gross area of approximately 3,000 square metres with views over Romana Square. The project management will be undertaken by Globus, an experienced local developer in Romania. Construction commenced in the June 2008 with completion anticipated in the second quarter of 2010. Upon completion, the building will provide a net lettable office area of around 2,480 square metres over 7 floors, together with 40 car parking spaces.
The Company will pay a total purchase price of €9 million (including development costs) of which €2.1 million has been paid to date. Financing for the project has credit approval by the Bank of Cyprus. Upon debt draw down, the Company's total equity requirement is expected to be €1.9 million with debt finance to fund the balance.
The acquisition gives the company further exposure to both a city centre location and the office rental market. On base case rents of €22 per square metre per month, the implied acquisition yield amounts to 9.4 per cent., up from the 8.9 per cent. assumed when the acquisition was first signed in February last year. The continued strength of the Bucharest office market should underpin our current rental assumptions, with achieved rents in the area currently exceeding €22 per square metre per month. DTZ have estimated the completion value to be €12 million.
Joint venture with SCD Group
In June 2008, the Company agreed to enter into a joint venture with SCD Group to develop residential projects in western Romania. On formation the joint venture completed the acquisition of two residential development sites, one in Oradea and the other in Satu Mare.
The Oradea site comprises 33,862 square metres with the intention to deliver 388 apartments. Detailed planning and construction consents will be required from local planners and are expected to be received by the third quarter of 2008. The second site in Satu Mare comprises 6,700 square metres and has a building permit for 165 apartments. Construction on both sites is expected to commence in the first quarter of 2009.
Finance Report
The Company has continued to produce strong financial results from its investments in both income producing properties, joint venture projects and other property investments. The gross amount invested was €92.7 million, of which 45 per cent. has been financed by bank debt of €41.2 million. At 31 December 2007, €22.5 million of cash was available for further investments, of which part has since been used to acquire a 100 per cent. interest in Romana, an office development in the centre of Bucharest and 50 per cent. in two additional properties in western Romania through a joint venture with SCD.
Financial Results
Profit before tax for the year ended 31 December 2007 increased by €6.6 million to €7.9 million (2006 : €1.3 million). The increase was the net effect of the following:
Operating revenues from rental income increased by €1.5 million from two office properties for the whole year and two office properties for part of the year, compared to the previous year when only two properties were income producing and for only part of the year.
Fair value adjustments to the investment properties of €9.6 million were recognised in 2007 (2006: €3.6 million) and related to the four income producing office properties of which two were acquired during the year.
Negative goodwill of €1.4 million arose on the acquisitions of Baneasa Business Centre and Evo Centre. In accordance with IFRS this was recognised in its entirety in the income statement during the year. In 2006, positive goodwill arose on the acquisition of the Cascades building of €1.0 million and was considered to be fully impaired in the year as the fair value accounting adopted already recognised the future expected value.
Operating expenses of €4.3 million, some €1.1 million more than in 2006, reflected the increased scale of the business. Legal and professional fees include advisers' fees for assistance in relation to due diligence, acquisitions, structuring and loan financing.
Net financing costs were €1.0 million (2006: €0.3 million).
The share of loss of joint ventures of €0.6 million (2006: €0.2 million) related to foreign exchange and interest costs.
The corporate income taxation charge reduced to €0.3 million (2006: €0.5 million) and the Group will continue to seek tax-efficient structures to mitigate tax liabilities in the future. The deferred income tax charge arises from the increase in the current fair market value of the investment properties and is only applicable to asset sales. However the deferred income tax liabilities are not expected to become payable as any property sale would be affected through the sale of the shares of the relevant holding SPV and not the property itself.
Earnings per share was €0.12 per share (2006: €0.06 per share), an increase of 133 per cent.
Cash Flows
At 31 December 2007, net cash was €22.5 million, a reduction of €19.7 million in the year from the net cash at the previous year end of €42.2 million.
The net cash outflow in the year was principally due to investments made, of €25.4 million and net operating cash flows of €1.0 million, offset by net borrowings obtained of €6.8 million.
Financial Position
Total assets at 31 December 2007 were €115.9 million (2006: €114.5 million) and principally comprised investment properties, investments in joint ventures, other investments, loans receivable and cash. Total liabilities were €49.5 million (2006: €54.0 million) and were predominately long-term borrowings secured against the value of the investment properties and deferred tax arising on differences in accounting and tax treatments, trade payables and short-term borrowings.
Accordingly, net assets at 31 December 2007, prepared under IFRS, were €66.4 million, an increase of €6.0 million compared to the previous year end's net assets of €60.4 million. In summary, net assets were made up as follows:
| At 31 December 2007 €'million | At 31 December 2006 €'million | |
| Investment properties | 71.8 | 28.4 |
| Loans receivable (including interest) | 15.6 | 37.8 |
| Investment in joint ventures | 5.3 | 5.7 |
| Cash at bank | 22.5 | 42.2 |
| Borrowings | (41.2) | (50.8) |
| Other assets / (liabilities) | (7.6) | (2.9) |
| Net assets | 66.4 | 60.4 |
The Company's investment property portfolio has been included at a valuation of €71.8 million at 31 December 2007 (2006: €28.4 million), an increase of €43.4 million in the year. The increase in the carrying value was due to the acquisitions of the Baneasa Business Centre and the Evo Centre properties at a fair value of €33.7 million in total, and from a revaluation of the property portfolio by €9.6 million at the year end, based on a valuation performed by DTZ.
Loans receivable were shareholder loans to the Lakeview, Cubic Centre and Timisoara developments. The reduction in loans receivable in the year arose from the unwinding of a financing structure through Moulen Beleggingen BV ("Moulen") which had led to loan assets of €30.7 million and also loan liabilities of €30.7 million being recognised at 31 December 2006. These loans were assigned in the year to a new subsidiary of the Company in the Netherlands, Fabian Finance BV, thus removing both the potential credit risk associated with the exposure to Moulen and the requirement for the €30.7 million grossing up effect of the balance sheet loan assets and liabilities of the Group.
The decrease in the carrying value in investments in joint ventures was due to the recognition of the Group's share of losses and foreign exchange losses on retranslation.
Borrowings comprise bank loans of €41.2 million (2006: €18.6 million) secured against the investment properties and loans to Moulen of €nil (2006: €30.7 million) (which are mentioned above).
Accordingly, net assets per share, prepared under IFRS, increased in the year by 9.7 per cent. to €1.304 per share from €1.189 per share.
Published NAV per share
The net assets per share prepared under IFRS ("IFRS NAV") differ from the amount calculated in accordance with the Company's Articles of Association and which is published quarterly ("Published NAV"). The differences arise as adjustments to certain figures are made for the Published NAV per share which are not recognised within the accounts under IFRS.
The Published NAV, was €1.700 per share, a gain over the year of €0.344 per share equating to an increase of 25.37 per cent. A break-down of the Published NAV is summarised below:
| As at 31 December '07 | Fabian Romania's share of Market Value | Bank (debt) | Net Worth | Net Equity invested ** | |
| €m | €m | €m | €m | ||
| Cascades | 18.5 | (9.2) | 9.3 | 2.6 | |
| Banu | 17.7 | (8.9) | 8.8 | 3.4 | |
| New Town * ^ | 20.7 | (5.2) | 15.5 | 5.8 | |
| Lakeview *^ | 10.8 | (5.6) | 5.1 | 2.4 | |
| Cubic Center | 12.4 | 0.0 | 12.4 | 12.5 | |
| Baneasa Business Center | 29.5 | (19.5) | 10.0 | 4.2 | |
| Timisoara * ^ | 4.0 | (2.5) | 1.5 | 1.6 | |
| Evo Centre | 6.1 | (3.7) | 2.4 | 1.5 | |
| Net Cash | 23.9 | ||||
| Other assets / (liabilities) | (2.5) | ||||
| Sub-total | 119.7 | (54.7) | 86.4 | 34.0 | |
| Shares (#) | 50,831,130 | ||||
| NAVPS (€) | 1.7001 | ||||
| Growth in 2007 | 25.4% | ||||
| * represents Fabian Romania's share of the development | |||||
| ** net equity invested comprises the original acquisition equity less amounts repaid through refinancing | |||||
| ^ includes development WIP financed by bank debt | |||||
The adjustments to the IFRS NAV to arrive at the Published NAV include the revaluation of joint venture investments, the exclusion of deferred tax arising on property revaluations and the capitalisation of the Company's share of losses in joint ventures.
Reconciliation between the IFRS NAV and the Published NAV is as follows:
| €'million | |
| Net assets, prepared under IFRS | 66.4 |
| Revaluation of joint venture investments | 12.7 |
| Deferred tax not expected to crystallise | 6.5 |
| Share of loss of joint ventures | 0.8 |
| Net assets, per the Company's Articles of Association | 86.4 |
Valuations of the New Town, Lakeview and Timisoara joint ventures, as prepared by DTZ at 31 December 2007, have been included in the Published NAV. These valuations were not applied to the IFRS accounts to ensure compliance with IFRS.
The deferred tax liability reported under IFRS of €6.5 million is primarily based on the current fair market value of the investment properties and which is only applicable to asset sales. These deferred income tax liabilities are not expected to become payable as, in the event of a property sale, this will be effected through the sale of the shares of the relevant holding SPV and not the property itself. For the purposes of calculating the Published NAV the deferred tax liability is added back in order to report a more representative figure of the value which may be realised as the likelihood is that the deferred tax liability will never crystallise.
Share of losses of joint ventures to date are written off under IFRS whereas when preparing the Published NAV all costs are capitalised in work in progress.
The Published NAV however, excludes the net present value of future profits that will be generated from the development projects. In order to provide transparency to shareholders as to the potential level of such future development profits that may accrue to the Company, DTZ has been asked to provide estimates of these development profits. Shareholders may then choose to discount these profits to estimate their net present value in today's terms based on current market conditions.
The forecast development profits were estimated at €26.1 million or €0.514 per share. If this is taken into account, the potential future NAV ("Development Profit NAV" or "DPNAV") is expected to be €2.214 per share, an increase of 43.2 per cent. over the year (31 December 2006: €1.546).
A break-down of the future development profit at 31 December 2007 is summarised below:
| Project | Implied Fabian Romania's share of future Development Profit (€m) | Year of Completion * |
| Cubic Centre | 4.4 | 2009 |
| New Town | 8.1 | 2009 |
| Lakeview | 8.9 | 2009 |
| Timisoara | 4.8 | 2010 |
| NAV contribution (€m) | 26.1 | |
| NAV contribution per share (€) | 0.514 |
* Fabian Romania estimates
Valuation
With investments in eight projects as at 31 December 2007, namely Cascades, Banu Antonache, Baneasa Business Centre, Evo Centre, Lakeview, Cubic Centre, New Town and Timisoara, the Group has witnessed an uplift in market valuations since acquisition of these projects over 2007 of approximately €43 million as follows:
DTZ valued the Company's four income producing assets at €71.8 million. The total initial investment in these properties amounted to €11.7 million resulting in an uplift of €60.4 million of which €41.1 million has been financed through debt. Thus giving a return on investment of 165 per cent..
Similarly DTZ valued the Company's 50 per cent. share in the Lakeview, New Town and Timisoara joint venture projects, at €35.5 million. The total initial investment in these joint ventures amounts to €12.7 million resulting in an uplift of €22.8 million or 177 per cent. of invested capital.
Financial Structure
The Group finances its activity through a combination of shareholders' equity, cash and bank loans.
Shareholders' equity increased in the year by €6.0 million to €66.4 million through retained profits net of translation losses.
At the year end, there were cash balances of €22.5 million, mainly representing residual monies from the €38.1 million net proceeds raised at admission to AIM in December 2006.
Bank loans totalling €41.2 million were outstanding at 31 December 2007, secured against the four income producing properties, Banu Antunache, Cascades, Baneasa Business Centre and Evo Centre. In addition a further €26.6 million of bank loans were outstanding in the joint venture companies of which the Group's share amounted to 50 per cent..
Given the current economic conditions the Investment Manager's strategy has been to keep loan to value ratios under review in order to offer shareholders an attractive return on their investment. At present the Group has a gearing ratio on its investments of 45 per cent..
Anthony Foster
Fabian Capital Limited
23 June 2008
Corporate Governance Statement
Compliance
The Company recognises the importance of the principles of good corporate governance. As an AIM quoted company, Fabian Romania is not required to follow the provisions of the Combined Code on Corporate Governance effective from June 2006 (the "Code"). Nonetheless, the Company seeks to comply, where appropriate for a company of its size and nature, with the principles referred to in section 1 of the Code and the guidelines published by the Quoted Companies Alliance. The statements set out below describe how the principles identified in section 1 of the Code and those guidelines are applied by the Company.
Board Constitution and Procedures
All of Fabian Romania's seven directors are non-executive directors. Of these, Mark Holdsworth is also a director of the Investment Manager and four are directors of the JTC Group, the parent company of Fabian's administrator. These relationships prevent them from being considered as independent under the criteria set out in the Code and the guidelines referred to above.
The Board is responsible for acquisitions, partnerships, divestments, major capital commitments and focuses upon the Company's long-term objectives, strategic direction and dividend policy. The Directors have access to the advice and services of the Investment Manager and the Company's administrator and the Directors are able to take independent professional advice in the furtherance of their duties if necessary. The Directors receive training and advice on their responsibilities as appropriate. All Directors will submit themselves for re-election at least once every three years.
Board Committees
The Board has delegated clearly defined powers to its Audit Committee. This comprises at least two Directors and will be responsible for ensuring that the financial performance of the Company is properly reported and monitored. The committee reviews the Company's annual and interim accounts, results, announcements, internal control systems and procedures and accounting policies.
In view of the nature of the Company as a Jersey investment fund, the Board decided at the time of the Company's admission to AIM not to establish remuneration or nomination committees.
Communication with Investors
Fabian Romania places a great deal of importance on communication with its institutional and private shareholders and responds quickly to all queries received. There is regular dialogue with institutional shareholders as well as general presentations after the issue of preliminary results. All shareholders are given at least 21 days' notice of the company's Annual General Meeting each year, at which Directors are introduced and available for questions.
Internal Control
Fabian Romania's control systems are the responsibility of the Board. The Board oversees a system of internal financial controls whose objective is to safeguard group assets, ensure proper accounting records are maintained, and that the financial information generated is reliable. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and, as such, it can only provide reasonable and not absolute assurance against material misstatement or loss. Risks to the business are considered on an ongoing basis by the Board. Identified risks are prioritised and agreed programmes of minimisation or elimination are monitored as is the ongoing risk profile.
The Board has considered it inappropriate to establish an internal audit function given the size of the Group. This decision will be kept under review as the operations of the Group develop.
Directors' report
The Directors present their report to the members together with the consolidated financial statements and auditors' report for the year from 1 January 2007 to 31 December 2007.
Incorporation
The Company was incorporated in Jersey, Channel Islands on 20 April 2005.
Activities and results
The principal activity of the Group is that of investing in Romanian property via Romanian companies and the advancing of loans to enable such investments to be made. The Group also has invested in three joint venture companies who are developing properties in Romania. Since the year end further investments have been made in an office development project and joint venture to development residential projects in Western Romania. The results of the Group are set out in the consolidated income statement.
Dividends
The Directors do not recommend the payment of a dividend for the year (2006: € Nil).
Directors
The Directors of the Company who held office during the year, and subsequently, were:-
| Jaroslav Kinach (Chairman) | (Appointed 16 February 2007) |
| Mark Benedict Holdsworth | (Appointed 20 April 2005) |
| Nigel Anthony Le Quesne | (Appointed 20 April 2005) |
| Stephen Anthony Burnett | (Appointed 20 April 2005) |
| Mark Houslop | (Appointed 31 January 2007) |
| Nigel Charles Syvret | (Appointed 20 April 2005) |
| Philip Henry Burgin | (Appointed 20 April 2005) |
| Antony Hillman | (Appointed 19 January 2007, resigned 31 July 2007) |
Secretary
The secretary of the Company is JTC Management Limited, which was appointed on 22 April 2005.
Independent auditors
All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company's auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware.
The auditors, KPMG Romania SRL, replaced KPMG Channel Islands Limited on 19 September 2007 and have expressed their willingness to continue in office.
| By order of the Board | Registered office |
| Elizabeth House | |
| 9 Castle Street | |
| St Helier | |
| For and on behalf of | Jersey |
| JTC Management Limited | JE2 3RT |
| Secretary |
Directors' responsibilities statement
The Directors are responsible for preparing the financial statements in accordance with applicable law and International Financial Reporting Standards.
Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and any other irregularities.
Independent Auditors' Report
The Members Fabian Romania Limited
We have audited the accompanying group and company financial statements (the "financial statements") of Fabian Romania Limited as at 31 December 2007 and for the year then ended which comprise the consolidated income statement, the consolidated and company balance sheets, the consolidated statement of changes in equity and the consolidated cash flow statement, and a summary of significant accounting policies and other explanatory notes.
Director's Responsibility for the Financial Statements
The Directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and Companies (Jersey) Law 1991. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors' Responsibility
We report to you our opinion as to whether the financial statements give a true and fair view in accordance with International Financial Reporting Standards and are properly prepared in accordance with the Companies (Jersey) Law 1991. We also report to you if, in our opinion, the company has not kept proper accounting records or if we have not received all the information and explanations we require for our audit.
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion
Opinion
In our opinion, the financial statements:
give a true and fair view of the Group's and Company's financial position as at 31 December 2007, and of the Group's consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards; and
have been properly prepared in accordance with the Companies (Jersey) Law 1991.
Other matters
This report is made solely to the company's members, as a body, in accordance with Article 110 of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Report on conformity of the Chairman's Statement, the Investment Manager's Report, the Finance Report, the Corporate Governance Statement and the Directors' Report with the Financial Statements
We have read the Chairman's Statement, the Investment Manager's Report, the Finance Report, the Corporate Governance Statement and the Directors' Report accompanying the financial statements and we have not identified any financial information which is not in accordance, in all material respects, with the information presented in the accompanying financial statements as at and for the year ended 31 December 2007.
Bucharest, Romania
23 June 2008
KPMG Romania SRL
Consolidated income statement
For the year ended 31 December 2007
| Year to 31 Dec 07 € | Year to 31 Dec 06 € | ||
| Rental revenues | 3,156,040 | 1,564,327 | |
| Service charge revenues | 949,929 | 419,910 | |
| Service charge expenses | (1,216,330) | (533,327) | |
| Net rental and related income | 2,889,639 | 1,450,910 | |
| Fair value adjustment investment properties | 9,613,574 | 3,600,000 | |
| Negative goodwill / (Impairment of goodwill) on acquisition of subsidiaries | 1,361,200 | (1,006,563) | |
| Amortisation of set up costs | - | (126,648) | |
| Investment management fees | (1,499,994) | (588,038) | |
| Other operating expenses | (1,330,313) | (418,640) | |
| Legal and professional fees | (1,433,995) | (662,284) | |
| Cost of issuing shares | - | (400,329) | |
| Total operating expenses | (4,264,302) | (3,202,502) | |
| Profit from operating activities | 9,600,111 | 1,848,408 | |
| Finance income | 2,581,184 | 1,960,267 | |
| Finance expenses | (3,462,351) | (2,262,033) | |
| Fair value loss on financial instruments | (165,863) | - | |
| Net financing costs | (1,047,030) | (301,766) | |
| Share of losses of joint ventures using the equity method of accounting | (625,910) | (201,776) | |
| Profit before taxation | 7,927,171 | 1,344,866 | |
| Current income tax expense | (315,988) | (524,984) | |
| Deferred income tax (expense)/release | (1,530,714) | 564,870 | |
| Net profit for the year attributable to equity holders of the Group | 6,080,469 | 1,384,752 | |
| Basic earnings per share | 0.12 | 0.06 |
As at 31 December 2007 and 31 December 2006, there is no difference between basic and diluted earnings per share. The loss of the Company for the year ended 31 December 2007 is €483,412 (2006: Loss €136,850).
Consolidated and Company balance sheets
As at 31 December 2007
| Group as at 31 Dec 07 | Company as at 31 Dec 07 | Group as at 31 Dec 06 | Company as at 31 Dec 06 | ||
| € | € | € | € | ||
| ASSETS | |||||
| Property, plant and equipment | - | - | 10,700 | - | |
| Investment properties | 71,770,000 | - | 28,400,000 | - | |
| Other investments | 15,620,340 | 42,022,222 | 37,677,941 | 18,707,785 | |
| Investment in subsidiaries | - | 410,713 | - | 39,094 | |
| Investment in joint ventures | 5,275,938 | 6,250 | 5,748,812 | 6,250 | |
| Total non-current assets |
| 92,666,278 | 42,439,185 | 71,837,453 | 18,753,129 |
| Trade and other receivables | 664,582 | 169,805 | 425,245 | 93,081 | |
| Cash at bank | 22,528,016 | 16,637,045 | 42,196,171 | 41,035,342 | |
| Total current assets |
| 23,192,598 | 16,806,850 | 42,621,416 | 41,128,423 |
| Total assets |
| 115,858,876 | 59,246,035 | 114,458,869 | 59,881,552 |
| EQUITY | |||||
| Issued capital | 508 | 508 | 508 | 508 | |
| Share premium account | 59,763,267 | 59,763,267 | 59,736,839 | 59,736,839 | |
| Retained earnings / (Accumulated losses) | 6,759,600 | (1,103,971) | 679,131 | (620,558) | |
| Translation reserve |
| (139,904) | - | - | - |
| Total equity attributable to equity holders of the Group |
| 66,383,471 | 58,659,804 | 60,416,478 | 59,116,789 |
| LIABILITIES | |||||
| Interest bearing loans and borrowings | 40,255,996 | - | 50,360,943 | - | |
| Derivative financial instruments carried at fair value | 165,863 | - | - | - | |
| Deferred income tax liabilities | 6,514,294 | - | 1,705,614 | - | |
| Other non-current liabilities | 887,982 | - | 205,065 | - | |
| Total non-current liabilities |
| 47,824,135 | - | 52,271,622 | - |
| Interest bearing loans and borrowings | 903,921 | - | 458,295 | - | |
| Current income tax payable | 60,620 | - | 369,454 | - | |
| Trade and other payables | 686,729 | 586,231 | 943,020 | 764,763 | |
| Total current liabilities |
| 1,651,270 | 586,231 | 1,770,769 | 764,763 |
| Total liabilities | 49,475,405 | 586,231 | 54,042,391 | 764,763 | |
| Total equity and liabilities |
| 115,858,876 | 59,246,035 | 114,458,869 | 59,881,552 |
Consolidated statement of changes in equity
For the year ended 31 December 2007
| Share Capital € | Share Premium € | Retained Earnings € | Translation Reserve € | Total € | |||
| As at 1 January 2007 | 508 | 59,736,839 | 679,131 | - | 60,416,478 | ||
| Profit for the year | - | - | 6,080,469 | - | 6,080,469 | ||
| - | |||||||
| Cost of share issue over-accrued in 2006 | - | 26,428 | - | - | 26,428 | ||
| Exchange losses on translation | - | - | - | (139,904) | (139,904) | ||
| Balance at 31 December 2007 | 508 | 59,763,267 | 6,759,600 | (139,904) | 66,383,471 | ||
| Share Capital € | Share Premium € | Retained Earnings € | Translation Reserve € | Total € | |||
| As at 1 January 2006 | 312 | 21,201,288 | (705,621) | - | 20,495,979 | ||
| Profit for the year | - | - | 1,384,752 | - | 1,384,752 | ||
| - | |||||||
| Issue of share capital | 196 | 39,999,705 | - | - | 39,999,901 | ||
| Cost of share issue | - | (1,464,154) | - | - | (1,464,154) | ||
| Balance at 31 December 2006 | 508 | 59,736,839 | 679,131 | - | 60,416,478 | ||
Consolidated cash flow statement
For the year ended 31 December 2007
| Group Year to 31 Dec 07 € | Group Year to 31 Dec 06 € | ||
| Cash (outflow) / inflow from operations | (361,784) | 639,249 | |
| Income tax paid | (624,821) | (213,017) | |
| Cash (outflow) / inflow from operations | (986,605) | 426,232 | |
| Investing activities | |||
| Acquisition of subsidiaries | (15,799,530) | (7,514,723) | |
| Investment in joint ventures | - | (5,750,000) | |
| Loans granted | (15,830,798) | (24,130,220) | |
| Proceeds from loan reimbursements | 4,721,011 | 1,850,000 | |
| Interest received | 1,594,853 | 150,025 | |
| Acquisition of investment property | (86,426) | (218,456) | |
| Net cash outflow from investing activities | (25,400,890) | (35,613,374) | |
| Financing activities | |||
| Proceeds from borrowings | 10,018,917 | 35,836,622 | |
| Repayment of borrowings | (872,526) | (5,057,526) | |
| Interest paid | (1,723,512) | (711,846) | |
| Proceeds from shares issued | - | 40,359,000 | |
| Payment of share issuance costs | (614,382) | (1,296,724) | |
| Net cash inflow from financing activities | 6,808,497 | 69,129,526 | |
| Net (decrease)/ increase in cash and cash equivalents | (19,578,998) | 33,942,384 | |
| Cash and cash equivalents at the beginning of year | 42,196,171 | 8,253,787 | |
| Effect of foreign exchange rates on cash and cash equivalents | (89,157) | - | |
| Cash and cash equivalents at end of year | 22,528,016 | 42,196,171 |
Notes to the accounts
1. Incorporation and principal activities
Fabian Romania Limited (the "Company") is a Company domiciled in Jersey. The address of the Company's registered office is Elizabeth House, 9 Castle Street, St Helier, Jersey. The consolidated financial statements of the Company as at and for the year ended 31 December 2007 comprise the Company and its subsidiaries (the "Group") and the Group's interest in joint ventures. The Group invests in Romanian property.
2. Basis of Preparation
a) Statement of compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations adopted by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.
The accounts of the Romanian subsidiaries and joint ventures are maintained in Romanian lei ("lei" or RON) in accordance with Romanian accounting law. These accounts have been adjusted to reflect the differences between the statutory accounts and IFRS. Accordingly, such adjustments have been made to the statutory accounts as have been considered necessary to bring their financial statements into line, in all material respects, with IFRS.
b) Basis of preparation
The financial statements have been prepared under the historical cost basis (except for derivative financial instruments and investment property which are measured at fair value). The accounting policies have been consistently applied by the Group and are consistent with those used in the previous year.
c) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Subsidiary investments are carried at cost of investment in the individual financial statements.
The subsidiaries of Fabian Romania Limited, all of which have been included in these financial statements, are as follows:
| Name | Country of incorporation | Proportion of ownership | Activity |
| Cardeka Holdings Limited | Cyprus | 100 per cent. | Holding Company |
| Fabian One S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Three S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Four S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Five S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Six S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Seven S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Eight S.R.L. | Romania | 100 per cent. | Holding Company |
| Fabian Nine S.R.L. | Romania | 100 per cent. | Holding Company |
| Name | Country of incorporation | Proportion of ownership | Activity |
| Cascade Imobiliare Consult S.R.L. | Romania | 100 per cent. | Leasing of owned or rented properties |
| Cascade Consulting Romania S.R.L | Romania | 100 per cent. | Leasing of owned or rented properties |
| Romulex Technology Construct S.R.L | Romania | 100 per cent. | Leasing of owned or rented properties |
| Baneasa Center S.R.L | Romania | 100 per cent. | Leasing of owned or rented properties |
| CHF Investitii S.R.L | Romania | 100 per cent. | Leasing of owned or rented properties |
| Fabian Finance B.V. | Netherlands | 100 per cent. | Finance vehicle |
(ii) Transactions eliminated on consolidation
Intra-Group balances, and any unrealised income and expenses arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investees. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
(iii) Goodwill
Goodwill (negative goodwill) arises on the acquisition of subsidiaries, associates and join ventures.
Goodwill represents the excess of the cost of the acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.
Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange.
Subsequent measurement
Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment.
(iv) Joint ventures (equity accounted investees)
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Associates and joint ventures are accounted for using the equity method (equity accounted investees). The consolidated financial statements include the Group's share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.
Interest in Joint Venture entities are carried at cost in the individual financial statements of the Joint Venturer.
The Group has the following investments in joint ventures:
| Country of incorporation | Ownership | ||
| AIG/Lincoln Lakeview S.a.r.L | Luxembourg | 50 per cent. | |
| Phoenix Park S.R.L. | Romania | 50 per cent. | |
| Coltex Invest Construct S.R.L. | Romania | 50 per cent. | |
d) Functional and presentation currency
Functional currency
The Directors have assessed the functional currency as being the euro until 31 December 2006 because all lending and borrowing, rental, lease contracts were denominated in euro. Therefore the management elected to prepare the Group's financial statements in euro until 31 December 2006.
Starting with 2007, based on the factors described in IAS 21 "The effects of changes in foreign exchange rates" and based on analysis of the primary economic environment in which the Group operates, the functional currency of the underlying Romanian subsidiaries and joint ventures has been determined to be the Romanian Lei since whilst many of their transactions are denominated in the euro, it is in fact the local markets and competitive forces in Romania which determine the magnitude of these transactions.
The functional currency of the Company and its wholly owned subsidiary Cardeka Holdings Limited has been assessed as being the euro. These entities are investment holding companies and as such are not reliant upon local markets for the manufacturing or production of goods or services. Lending and borrowings of both entities is executed in euros and most of their income and expense is likewise denominated in the Euro. It is therefore appropriate that the functional currency of these entities remain the euro.
Presentation currency
The Directors of the Company decided to adopt euro as the presentation currency for the purpose of presenting the consolidated financial statements in accordance with IFRS.
The balance sheet items of the Romanian subsidiaries and joint ventures have been translated into euros by dividing the RON amounts at the National Bank of Romania ("NBR") official exchange rates as at the date of each balance sheet, as set out below:
| 31 December 2007 | 31 December 2006 | |||
| RON/euro | 3.6102 | 3.3817 |
The income statement items of the Romanian subsidiaries and joint ventures for the period ended 31 December 2007 were translated using the average exchange rate for the year of 3.3373 RON/euro. The translation of the balance sheet and statement of income items into the presentation currency gave rise to a translation reserve. Cash flows are translated using appropriate average exchange rates.
Components of equity are not retranslated, but recorded in euro from the initial translation into the presentation currency.
Such computations and presentation of amounts in euro should not be considered as a representation that the RON amounts have been or could be converted into euro at these rates or any other rates.
e) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
3. Significant accounting policies
The significant accounting policies adopted in the preparation of the financial statements of the Group are set out below. The accounting policies have been consistently applied by the Group and are consistent with those used in the previous year.
a) Foreign currency
Transactions in foreign currencies are translated to the functional currency of the Group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.
Foreign currency differences arising on retranslating are recognised in profit or loss, except for differences arising on the retranslating of equity accounts.
b) Financial instruments
(i) Non-derivative financial instruments
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses.
Cash and cash equivalents comprise cash balances and bank deposits. For the purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, cash held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts.
A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities are derecognised if the Group obligations specified in the contract expire or are discharged or cancelled.
Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses.
(ii) Derivative financial instruments
The Group holds derivative financial instruments to hedge its interest rate risk exposure. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.
Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit and loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes in the fair value of separate embedded derivatives are recognised immediately in profit and loss.
(iii) Shareholders' equity
Ordinary share capital
Ordinary shares are classified as equity. All shares rank equally with regard to the Group's residual assets. Costs directly attributable to the issuing of equity instruments are taken to the share premium account.
Translation reserve
In translating the financial statements of the Romanian subsidiaries and joint ventures into euro's, all resulting exchange differences are recorded in equity. The differences arise on the translation of income and expense items at the average exchange rate for the period, assets and liabilities at the balance sheet date and on components of equity that are not retranslated.
Share Premium
Where shares in the Company are issued at a premium to their nominal value any surplus is recognised in the share premium account. Any costs directly attributable to the issuing of equity instruments are taken to the share premium account.
c) Investment Property
Investment property is property held either to earn rental income or for capital appreciation or for both. Investment property is measured at fair value with any change therein recognised in profit or loss.
When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.
d) Trade and other receivables
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the collection terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is determined based on the Directors' risk assessment of the receivables recoverability.
e) Impairment of assets
(i) Financial assets
The carrying amounts of the Group's financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.
Financial assets are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows.
An impairment loss in respect of financial assets is calculated as the difference between the carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.
(ii) Non financial assets
The carrying amounts of non financial assets, except investment properties and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. If any such indication exists then the asset's recoverable amount is estimated. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the assets (or cash-generating unit) is reduced to its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised as an expense immediately, unless the relevant asset is property, plant and equipment stated at revalued amount in which case the impairment loss is treated as a revaluation decrease.
When an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revaluated amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
f) Interest-bearing borrowings
Interest-bearing loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. The transaction costs incurred in issuing the liability are amortised over the life of the loan.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method; any difference between fair value of the proceeds (net of transaction costs) and the redemption amount is recognised as interest expense over the period of the borrowings on an effective interest basis.
g) Provisions
A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Onerous contracts
A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.
h) Trade and other payables
Trade and other payables are stated at their amortised cost, which is the fair value of the consideration to be paid in the future for goods and services received.
i) Determination of Fair Values
A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
Investment property
An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued, values the Group's investment property portfolio every three months. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows then is applied to the net annual cash flows to arrive at the property valuation.
Valuations reflect, where appropriate: the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, and the market's general perception of their creditworthiness; the allocation of maintenance and insurance responsibilities between the Group and the lessee; and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices and where appropriate counter-notices have been served validly and within the appropriate time.
Trade and other receivables
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.
Derivatives
The fair value of derivatives is based on mark to market valuations. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date.
Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.
j) Revenue
Revenue includes gross rental income, service charge and management charges earned from investment properties. The Group's rental contracts are generally for a contract period between 5 and 10 years and are structured as operating leases. The majority of contracts require fixed minimum lease payments and are denominated in euro. Rental income from investment property leased out under operating lease is recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income.
k) Expenses
(i) Service charges and property operating expense
Service costs for service contracts entered into and property operating expenses are expensed as incurred.
(ii) Net financing costs
Finance income comprises interest income on the Group's invested and net foreign currency gains from translation of transactions in foreign currencies to the functional currencies of the Group. Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Finance expenses comprise interest expense on borrowings and net foreign currency losses from translation of transactions in foreign currencies to the functional currency of the Group. All borrowing costs incurred on financing the construction of qualifying assets are capitalized in the value of the assets until construction is complete.
Foreign exchange gains/losses arising on non-monetary assets stated at fair value are presented under financing costs.
l) Lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.
m) Income tax
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of income except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity.
Current tax is the expected tax payable calculated on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
Both at 31 December 2007 and 2006 the enacted tax rate expected to apply to the period when the deferred tax asset is realized or the deferred tax liability is settled is 16 per cent.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
The effect on deferred tax of any changes in tax rates is charged to the statement of income, except to the extent that it relates to items previously charged or credited directly to equity.
Additional income taxes that arise from the distribution of dividends are recognized at the same time as the liability to pay the related dividend.
n) Related parties
Parties are considered related when one party, either through ownership, contractual rights, family relationship or otherwise, has the ability to directly control or significantly influence the other party.
o) Standards, interpretations and amendments to published standards that are effective for annual periods beginning on 1 January 2007
As at 1 January 2007, the Group adopted the IFRSs below. The financial statements have been amended in accordance with the relevant requirements.
IFRS 7 Financial Instruments: Disclosures. The Standard requires increased disclosure about the significance of financial instruments for an entity's financial position and performance, and qualitative and quantitative disclosures on the nature and extent of risks.
Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures. As a complementary amendment arising from IFRS 7 (see above), the Standard requires increased disclosure in respect of the Group's capital.
p) Standards, interpretations and amendments to published standards that are not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for accounting periods beginning on or after 1 January 2008 or later periods. The Directors considered the following new standards, amendments and interpretations to existing standards:
Amendments to IFRS 2 'Share-based Payment' (effective from 1 January 2009) and IFRIC 11 - "IFRS 2 - Group and Treasury Share Transactions" (effective for annual periods beginning on or after 1 March 2007). It requires the attribution of cash-settled share-based payments granted by a parent to suppliers of goods and services (including employees) of a subsidiary in the financial statements of the subsidiary. Amendment to IFRS 2 is currently not relevant to the Group's operations because the Group does not have any share-based compensation plans. IFRIC 11 is currently not relevant to the Group's operations as the Group has not entered into any share-based payments arrangements;
Revised IFRS 3 'Business Combinations' (effective from annual periods beginning on or after 1 July 2009). The revised Standard also includes a number of other potentially significant changes including:
All items of consideration transferred by the acquirer are recognised and measured at fair value as of the acquisition date, including contingent consideration;
Transaction costs are not included in the acquisition accounting;
The acquirer can elect to measure any non-controlling interest at fair value at the acquisition date (full goodwill), or at its proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree;
Acquisitions of additional non-controlling equity interests after the business combination must be accounted for as equity transactions.
The Group has not yet completed its analysis of the impact of the revised Standard.
IFRS 8 'Operating segments' (effective from 1 January 2009). The Standard requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of any entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
This standard which becomes mandatory for the Group's 2009 financial statements is not expected to have any impact on the financial statements.
Revised IAS 1, 'Presentation of Financial Statements' (effective from 1 January 2009). The revised Standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Group is currently evaluating whether to present a single statement of comprehensive income, or two separate statements.
Revised IAS 23, 'Borrowing costs' (effective from 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group has adopted this standard in its financial statements as of 31 December 2007.
Revised IAS 27 'Consolidated and Separate Financial Statements' (effective for annual periods beginning on or after 1 July 2009). The revised Standard amends the accounting for non-controlling interest, the loss of control of a subsidiary and the allocation of profit and loss and other comprehensive income between the controlling and non-controlling interest. The Group has not yet completed its analysis of the impact of the revised Standard.
Amendments to IAS 32 'Financial Instruments: Presentation and IAS 1, Presentation of Financial Statements' (effective for annual periods beginning on or after 1 January 2009). The amendments introduce an exemption to the principle otherwise applied in IAS 32 for the classification of the instruments as equity and allow certain puttable instruments issued by an entity that would normally be classified as liabilities to be classified as equity if and only if they meet certain conditions. The amendments are not relevant to the Group's financial statements.
q) Comparatives
Comparative figures have been adjusted to conform to changes in presentation in the current year where it is considered necessary.
4. Net financing costs
|
| Year to 31 Dec 07 € | Year to 31 Dec 06 € |
| Interest income | 2,581,184 | 1,904,172 |
| Foreign exchange gains | - | 56,095 |
| Total finance income | 2,581,184 | 1,960,267 |
| Interest expenses | (3,175,361) | (2,262,033) |
| Fair value loss on financial instruments | (165,863) | - |
| Foreign exchange losses | (286,990) | - |
| Total finance expenses | (3,628,214) | (2,262,033) |
| Net financing costs | (1,047,030) | (301,766) |
5. Investment property
| Group as at 31 Dec 07 € | Company as at 31 Dec 07 € | Group as at 31 Dec 06 € | Company as at 31 Dec 06 € | |
| Brought forward | 28,400,000 | - | 12,490,756 | - |
| Additions due to business combinations (note 24) | 33,670,000 | - | 12,100,000- | - |
| Additions | 86,426 | 86,426 | - | - |
| Fair value gain on investment property | 9,613,574 | - | 3,600,000 | - |
| Cost to completion | - | - | 209,244 | - |
| 71,770,000 | - | 28,400,000 | - |
At 31 December 2007 the fair value of the investment properties is based on a valuation performed by an independent valuer, DTZ Echinoix. The valuation method applied is the capitalisation of rental income based on the rents payable under the existing lease agreements and average market rental values.
Further details of additions due to business combinations can be found in note 12.
6. Other investments
| Group as at 31 Dec 07 € | Company as at 31 Dec 07 € | Group as at 31 Dec 06 € | Company as at 31 Dec 06 € | |
| Loans receivable: | ||||
| AIG/Lincoln Lakeview S.a.r.L(1) | 2,434,039 | 2,434,039 | 5,353,500 | 5,353,500 |
| Less impairment losses | (697,781) | - | (194,338) | - |
| Net of impairment losses | 1,736,258 | 2,434,039 | 5,159,162 | 5,353,500 |
| Cubic Centre Development SRL(2) | 5,000,000 | - | - | - |
| Moulen Beleggingen B.V.(3) | - | - | 30,748,887 | 11,972,167 |
| Fabian Finance B.V.(3) | - | 13,698,033 | - | - |
| Cardeka Holdings Limited | - | 25,762,599 | - | 222,457 |
| Advance payment to Cubic Centre Development SRL(4) | 6,738,892 | - | - | - |
| Coltex Invest Construct SRL(5) | 1,743,527 | - | - | - |
| Less impairment losses | (13,277) | - | - | - |
| Net of impairment losses | 1,730,250 | - | - | - |
| Loan interest receivable: | ||||
| AIG/Lincoln Lakeview S.a.r.L | 127,551 | 127,551 | 216,588 | 216,588 |
| Cubic Centre Development SRL | 238,748 | - | - | - |
| Coltex Invest Construct SRL | 48,641 | - | - | - |
| Moulen Beleggingen B.V. | - | - | 1,553,304 | 943,073 |
| 15,620,340 | 42,022,222 | 37,677,941 | 18,707,785 |
(1) Loans receivable from AIG/Lincoln Lakeview S.a.r.L at 31 December 2007 bear interest at a rate of 13 per cent. per annum and are repayable, plus any accrued interest, at maturity on 31 December 2013. The loan is unsecured. This receivable shows a net decrease over the year. During the year a bank financing facility was secured in order to develop the project. A tranche was drawn down against the land value and the proceeds used to temporarily pay down the initial shareholder loans subject to undertakings that these shareholder loans would be made available again as required for the development project. In accordance with the accounting policy on the treatment of Group share of losses in respect of joint venture arrangements, any Group share of losses in excess of the carrying value of the investment are reflected by way of impairment of amounts receivable from the joint venture. The loan is shown after the effect of impairment in respect of the net of share of losses of €697,781, being losses recognised in excess of the cost of investment in the joint venture.
(2) Loans receivable from Cubic Centre Development SRL consist of a single drawdown on the entire facility of €5 million. The loan bears interest at a rate of 7 per cent. per annum and is repayable, plus any accrued interest at maturity on 27 April 2011. For this loan a mortgage agreement was concluded creating a security right of the Lender over the property. In addition to this a "Pledge agreement" has been concluded whereby the loan is secured upon the share capital of the borrower in favour of the lender.
(3) On 15 June 2007, a loan assignment agreement was entered into between a number of the Fabian Group companies and Moulen Bellingengen BV ("Moulen") transferring the relevant Moulen assets and liabilities to Fabian Finance BV (a wholly owned subsidiary of Fabian Romania Limited). The terms and conditions of the loans remain unaltered from those reported at 31 December 2006. As a result of these loan facilities now being granted to a Group entity, these intra-Group receivables are eliminated on consolidation.
(4) The Group paid a deposit for the future acquisition of the Cubic Center Development SRL whose principal activities are development of investment properties. The Directors have assessed that the payments made represent an advance deposit on the acquisition of the completed real estate development and should be accounted for as such at fair value initially and subsequently at amortized cost.
The Group has a commitment to complete the acquisition once the developer has delivered upon the development of the property. The consideration payable in respect of this is dependant upon a number of conditions. This commitment is described further in note 26.
(5) The loan receivable from SC Coltex Invest Construct SRL at 31 December 2007 has been drawn against a facility of €2 million. Interest is charged at a rate of 6 per cent. Principal and interest are to be repaid
7. Investment in Subsidiaries
The subsidiaries of Fabian Romania Limited, all of which have been included in these consolidated financial statements, are carried at cost in the individual financial statements as follows:
| Group as at 31 Dec 07 € | Company as at 31 Dec 07 € | Group as at 31 Dec 06 € | Company as at 31 Dec 06 € | |
| Cardeka Holdings Limited | - | 1,715 | - | 1,715 |
| Fabian One S.R.L.* | - | 6 | - | 6 |
| Fabian Three S.R.L.* | - | 6 | - | 6 |
| Fabian Four S.R.L.* | - | 1 | - | 1 |
| Fabian Five S.R.L.* | - | 3 | - | - |
| Fabian Six S.R.L.*. | - | 3 | - | - |
| Fabian Seven S.R.L.* | - | 3 | - | - |
| Fabian Eight S.R.L.* | - | 3 | - | - |
| Fabian Nine S.R.L.* | - | 3 | - | - |
| Cascades Imobiliare Consult S.R.L. ** | 37,360 | 37,360 | ||
| Romulex Technology Construct S.R.L.*** | - | 30 | - | 6 |
| Fabian Finance B.V.**** | - | 371,580 | - | - |
| - | 410,713 | - | 39,094 |
The Company owns 100 per cent. of the issued share capital and voting rights of Cardeka Holdings Limited, an investment holding Company incorporated in Cyprus and stated at cost. In the opinion of the Directors, the value of the investment is not less than cost.
(*) The Company owns 1 per cent. of the issued share capital of those entities marked by a single asterisk above. In the opinion of the Directors, the value of those investments is not less than cost.
(**) The Company owns 0.9 per cent. of the issued share capital of Cascade Imobiliare Consult S.R.L., a property leasing Company incorporated in Romania and stated at cost. In the opinion of the Directors, the value of the investment is not less than cost.
(***) The Company owns 1 per cent. of the issued share capital of Romulex Technology Construct S.R.L., an investment holding Company incorporated in Romania and stated at cost. In the opinion of the Directors, the value of the investment is not less than cost. During the year, Fabian Two S.R.L merged with its 100 per cent. owned subsidiary Romulex Technology Construct S.R.L. resulting in a reduction in share capital from €551 to €332. As a result of the re-organisation, Cardeka Holdings Limited now owns 92.67 per cent. of the share capital of Romulex Technology Construct S.R.L. with Fabian Romania Limited holding the remainder of the shares.
(****) The Company owns 100 per cent. of the issued share capital of Fabian Finance B.V. a finance vehicle incorporated in the Netherlands and stated at cost. In the opinion of the Directors, the value of the investment is not less than cost.
8. Investment in joint ventures
The carrying value of joint venture arrangements is detailed below:
| AIG/Lincoln Lakeview S.a.r.L | Phoenix Park S.R.L. | Coltex Invest Construct S.R.L. | Total | |
| € | € | € | € | |
| 1 January 2007 | - | 5,748,812 | - | 5,748,812 |
| Additions | - | 250 | 250 | |
| Group share of losses | *- | (108,940) | *(250) | (109,190) |
| Translation difference | - | (363,934) | - | (363,934) |
| 31 December 2007 | - | 5,275,938 | - | 5,275,938 |
| AIG/Lincoln Lakeview S.a.r.L | Phoenix Park S.R.L. | Total | |||
| € | € | € | |||
| 1 January 2006 | - | - | - | ||
| Additions | 6,250 | 5,750,000 | 5,756,250 | ||
| Group share of losses | *(6,250) | (1,188) | (7,438) | ||
| 31 December 2006 | - | 5,748,812 | 5,748,812 | ||
(*) In accordance with the Group accounting policy on treatment of joint venture arrangements, the Group's share of losses from joint venture interests are firstly deducted from the cost of investment. Where the Group's share of losses exceeds the cost of investment, any subsequent losses are deducted from amounts receivable from the joint venture.
The Group share of joint venture losses for the year ended 31 December 2007 have been recognised through income statement as follows:
| AIG/Lincoln Lakeview S.a.r.L | Phoenix Park S.R.L. | Coltex Invest Construct S.R.L. | Total | ||
| € | € | € | € | ||
| Losses recognised against cost of investment | - | (108,940) | (250) | (109,190) | |
| Losses recognised by impairment of amounts receivable | (503,443) | - | (13,277) | (516,720) | |
| 31 December 2007 | (503,443) | (108,940) | (13,527) | (625,910) | |
The principal activities of the joint venture arrangements are investment in property. Further details of these Joint Ventures can be found in note 22 "Related party transactions". Summary financial information for equity accounted investees prepared in accordance with IFRS, not adjusted for the percentage ownership held by the Group is presented below:
| Current Assets € | Non-Current Assets € | Total Assets € | Current Liabilities € | Non-Current Liabilities € | Revenue € | Expenses € | |
| Phoenix Park S.R.L. | 1,701,668 | 26,935,676 | 28,637,344 | 1,500,117 | 17,430,299 | 337 | 219,966 |
| AIG/Lincoln Lakeview | 2,489,001 | 13,546,624 | 16,035,625 | 1,294,121 | 16,137,005 | 194,490 | 701,322 |
| S.a.r.L Coltex Invest Construct S.R.L. | 1,412,957 | 7,512,299 | 8,925,256 | 6,591 | 8,454,395 | 1,633 | 28,685 |
| 5,603,626 | 47,994,599 | 53,598,225 | 2,800,829 | 42,021,699 | 196,460 | 949,973 |
Commitments of equity accounted investees
Phoenix Park S.R.L.
On 21 December 2006, Phoenix Park SRL entered into a loan agreement with HVB Tiriac SA Bank- present Unicredit Tiriac Bank, for financing the development costs of the "New Town Residence". As at 31 December 2007 two facilities were in existence as detailed below.
The first facility was for a loan of €45.5 million of which €10.4 million was drawn down at the year end. Interest is payable at a rate of euribor plus 2.25 per cent.. The loan is repayable at maturity on 28 February 2010 and is available to draw upon until 31 August 2009. The loan is secured by a first rank mortgage on all buildings to be constructed on the land and a second rank mortgage on the land at the development site.
The second facility is for a loan of RON 21.6 million of which no draw downs had been made at the year end. Interest is payable at a rate of euribor plus 2.25 per cent.. The loan is repayable at maturity on 28 February 2010 and is available to draw upon until 31 August 2009. The loan is secured by a first rank mortgage on all buildings to be constructed on the land and a second rank mortgage on the land at the development site.
The total cost estimated for the project, ignoring land acquisition is €84.5 million out of which, the total costs incurred at the 31 December 2007 was €16.6 million.
AIG/Lincoln Lakeview S.a.r.l
On 14 February 2007, BVB Real Estate SRL, the wholly owned subsidiary of AIG/Lincoln S.a.r.l, entered into a loan agreement with MKB Bank, for financing the development costs of the "Lakeview office building" derived from the enabling contract with AIG/Lincoln, up to the approximate value of €46.3 million. The facility is a loan of €46.3 million of which €11.3 million had been drawn down at 31 December 2007. Interest is payable at euribor + 1.36 per cent.. The loan is repayable at maturity on 14 February 2017 and is available to draw upon until the development is complete. The loan is secured by a first rank mortgage over the land and buildings at the development site, a pledge on shares, any cash balances held and by way of a comfort letter.
The total cost estimated for the project, ignoring land acquisition is €42.9 million out of which, the total costs incurred at 31 December 2007 was €2.4 million.
Coltex Invest Construct S.R.L.
On 11 June 2007 Coltex Invest Construct signed a loan agreement with Banca Romaneasca for both land and construction financing. As at 31 December 2007 two facilities were in existence as detailed below.
The first facility is for a loan of up to €4,6 million of which €4,5 million had been drawn down at 31 December 2007. Interest is payable at euribor + 2.4 per cent.. The loan is repayable on maturity at 11 December 2008 and is available to draw upon until that date. The loan is secured by a first rank mortgage over the land and existing buildings at the development site, a pledge on shares and any cash balances held.
The second facility is for a loan of up to €1 million of which €0.4 million had been drawn down at 31 December 2007. Interest is payable at euribor + 2.4 per cent.. The loan is repayable on maturity at 31 July 2008 and is available to draw upon until that date. The loan is secured by a first rank mortgage over the land and existing buildings at the development site, a pledge on shares and any cash balances held.
The total cost estimated for the project, ignoring land acquisition is €36,4 million out of which, the total costs incurred at 31 December 2007 was €1,2 million.
9. Interest bearing loans and borrowings
| Group as at 31 Dec 07 € | Company as at 31 Dec 07 € | Group as at 31 Dec 06 € | Company as at 31 Dec 06 € | |
| Non-current | ||||
| Loans from non-financial institution (1) | ||||
| - principal | - | - | 30,749,066 | - |
| - interest | - | - | 1,601,698 | - |
| Loans from financial institutions (2) | ||||
| - principal | 40,255,996 | - | 18,010,179 | - |
| 40,255,996 | - | 50,360,943 | - |
Current
| Current portion of loans from financial institutions | 903,921 | - | 458,295 | - |
| 903,921 | - | 458,295 | - |
Terms and conditions of outstanding loans from financial institutions are as follows:
As at 31 December 2007
| Currency | Nominal interest rate | Year of maturity | Face value | Carrying value | |
| € | € | ||||
| Secured bank loan | Euro | Euribor +2.2per cent. | 2016 | 4,620,588 | 4,579,928 |
| Secured bank loan | Euro | Euribor +2.2 per cent. | 2016 | 4,620,588 | 4,579,928 |
| Secured bank loan | Euro | Euribor +2.25 per cent. | 2014 | 8,868,700 | 8,815,353 |
| Secured bank loan | Euro | 6.28 per cent. | 2022 | 19,502,880 | 19,502,879 |
| Secured bank loan | Euro | Euribor +1.9 per cent. | 2012 | 3,681,829 | 3,681,829 |
| Total | 41,294,585 | 41,159,917 |
As at 31 December 2006
| Currency | Nominal interest rate | Year of maturity | Face value | Carrying value | |
| € | € | ||||
| Secured bank loan | Euro | Euribor +2.2 per cent. | 2016 | 4,743,239 | 4,702,977 |
| Secured bank loan | Euro | Euribor +2.2 per cent. | 2016 | 4,743,239 | 4,702,977 |
| Secured bank loan | Euro | Euribor + 2.25per cent. | 2014 | 9,118,800 | 9,062,520 |
| Secured bank loan | Euro | 6.28 per cent. | 2022 | n/a | n/a |
| Secured bank loan | Euro | Euribor +1.9 per cent. | 2012 | n/a | n/a |
| Total | 18,605,278 | 18,468,474 |
(1) On 15 June 2007, a loan assignment agreement was entered into between a number of the Group companies and Moulen Bellingengen BV ("Moulen") transferring the relevant Moulen assets and liabilities to Fabian Finance BV.
(2) Loans from financial institutions relates to Investkredit Bank AG and consists of agreements with Romulex Technology Construct S.R.L., Cascade Consulting Romania S.R.L. and Cascade Imobiliare Consult S.R.L., Baneasa Business Centre S.R.L. and Fabian Six S.R.L.. Further details are provided below.
The loan agreement concluded between Romulex Technology Construct S.R.L. ("Romulex") and Investkredit Bank AG was signed on 8 March 2006 for a credit line of €9,300,000 all of which has been drawn down. The interest rate is euribor plus 2.25 per cent. per annum for the term of the loan, on the amount advanced. The interest is payable quarterly, on the last day of each quarter. The loan will be reimbursed quarterly according to the repayment schedule. The maturity date of the loan is 7 March 2014. For this loan a mortgage agreement was concluded on 14 March 2006 with Investkredit, creating a security right of Investkredit over land, concession land, building and additional structures owned by Romulex. As at 31 December 2007 the balance payable is €8,868,700 (2006: €9,118,800).
On 26 June 2006 Cascade Consulting Romania S.R.L. and Cascade Imobiliare Consult S.R.L. (as borrowers - the "Borrower") concluded a loan agreement with Investkredit Bank AG (as lender - the "Lender") which provides a line of credit of an aggregate amount of €9,600,000 all of which has been drawn down. The interest rate is euribor plus 2.2 per cent. per annum for the term of the loan, on the amount advanced. The interest is payable quarterly, on the last day of each quarter. The loan will be reimbursed quarterly according to the repayment schedule. The maturity date of the loan is 26 June 2016. The loan together with its interest and other related costs is guaranteed by mortgage on the building and land located in 62-64 Buzesti Street, according to the Mortgage Agreement concluded on 25 July 2006. As at 31 December 2007 the balance payable is €9,241,576 (2006: €9,486,478).
On 28 June 2007 Baneasa Business Centre S.R.L. became 100 per cent. owned and the existing loan from Investkredit Bank AG was consolidated, see note 24 'Acquisition of subsidiaries'. This loan was refinanced and on 18 July 2007 a further drawdown of €19,680,000 was made under the terms of a new facility with Investkredit Bank AG. As a condition of the new loan an interest rate swap was contracted to enable the Group to manage its exposure to upward movements in interest rates. The interest rate swap has a notional contract amount of €19,680,000 and fixes the euribor borrowing rate at 4.78 per cent. per annum (with an additional spread of 150 basis points) meaning a fixed rate of 6.28 per cent. per annum until the contract expires on 30 June 2010. The fair value of the swap arrangement at 31 December 2007 was € 165,863 (2006: n/a). The interest and capital repayments are made at calendar quarters. As at 31 December 2007 the balance payable is €19,502,880 (2006: n/a).
On 12 October 2007 Fabian 6 concluded a loan agreement with Investkredit Bank AG which provides a line of credit of €3,675,000 all of which has been drawn down. The interest rate is euribor plus 1.90 per cent. per annum for the term of the loan, on the amount advanced. The interest is payable quarterly, on the last day of the quarter. The maturity date of the loan is 31 December 2012. The loan together with its interest and other related costs is guaranteed by mortgage on the land and real property on the site owned by CHF Investitii SRL. As at 31 December 2007 the balance payable is €3,681,829 (2006: nil).
The repayment schedule of long term and short term portions of bank borrowings is summarized below:
| As at 31 Dec 07 | As at 31 Dec 06 | |||
| € | € | |||
| 2007 | - | 495,402 | ||
| 2008 | 900,770 | 523,833 | ||
| 2009 | 1,011,573 | 562,797 | ||
| 2010 and over |
| 39,382,242 | 17,029393 | |
| Total principal payments |
| 41,294,585 | 18,611,425 |
10. Taxation
10.1. Reconciliation of effective tax rate
The Company is an "exempt company" for Jersey tax purposes so that its liability to Jersey taxation is limited to a flat fee, currently levied at £600 sterling per annum.
Tax on profits of the Group arising in Romania are computed using the tax rate of 16 per cent. (2006: 16 per cent.), both for current and deferred tax.
| The total tax expense for the year is detailed below | Year to 31 Dec 07 € | Year to 31 Dec 06 € |
| Current taxation expense | (315,988) | (524,984) |
| Deferred taxation credit/(expense) | (1,530,714) | 564,870 |
| Total income tax | (1,846,702) | 39,886 |
| Profit before taxation | 7,927,171 | 1,344,866 |
| Tax on profit at a tax rate of 16 per cent. | 1,268,347 | 215,179 |
| Effects of: | ||
| Non-taxable income | - | (207,816) |
| Non-deductible expenses | 986,050 | 626,931 |
| Effect of tax losses utilised | (42,989) | (24,657) |
| Losses carried forward | (382,559) | 526 |
| Change in unrecognised temporary differences | 17,853 | (650,049) |
| Income tax expense/(release) for the year | 1,846,702 | (39,886) |
10.2. Deferred tax liabilities
The deferred tax liability arises from the temporary difference between the fiscal and the carrying amount of Romanian assets and liabilities as presented below.
Statement of recognised deferred tax assets and liabilities
| Assets | Liabilities | Net | ||||||
| 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | |||
| € | € | € | € | € | € | |||
| Investment properties | - | - | 6,604,269 | 1,968,379 | 6,604,269 | 1,968,379 | ||
| Loans and borrowings | (8,296) | - | 39,857 | 22,872 | 31,561 | 22,872 | ||
| Trade and other receivables | (11,101) | (4,006) | - | 16,013 | (11,101) | 12,007 | ||
| Equity accounted investee | (42,761) | (45,650) | - | - | (42,761) | (45,650) | ||
| Interest expenses carried forward | (67,674) | (251,994) | - | - | (67,674) | (251,994) | ||
| Net tax assets/liabilities | (129,832) | (301,650) | 6,644,126 | 2,007,264 | 6,514,294 | 1,705,614 | ||
Movement in temporary differences during the year
| As at 1 Jan 2007 | Recognised in the income statements | Recognised in business combination | As at 31 Dec 2007 | |
| € | € | € | € | |
| Investment properties | 1,968,379 | 1,357,384 | 3,278,507 | 6,604,269 |
| Loans and borrowings | 22,872 | 8,689 | - | 31,561 |
| Trade and other receivables | 12,007 | (23,108) | - | (11,101) |
| Equity accounted investees | (45,650) | 2,889 | - | (42,761) |
| Interest expenses/tax losses carried forward | (251,994) | 184,320 | - | (67,674) |
| 1,705,614 | 1,530,174 | 3,278,507 | 6,514,294 |
Movements in the net deferred tax liability are also summarized below:
| Group as at 31 Dec 07 € | Company as at 31 Dec 07 € | Group as at 31 Dec 06 € | Company as at 31 Dec 06 € | |
| At 1 January | 1,705,614 | - | 1,243,166 | - |
| Deferred tax on acquisition of subsidiaries | 3,278,507 | - | 869,458 | - |
| Deferred tax charge for year | 1,530,174 | - | (407,010) | - |
| Net deferred tax liability | 6,514,294 | - | 1,705,614 | - |
| Tax effect of loss carried forward | (382,559) | - | (54,769) | - |
| Deferred tax asset not recognised in the financial statements | 382,559 | - | 54,769 | - |
| Deferred tax liability | 6,514,294 | - | 1,705,614 | - |
The investment properties recorded in the statutory accounts of Baneasa Center SRL, Cascade Consulting Romania SRL and Cascade Imobiliar Consult SRL are kept at revalued amounts as determined by an authorised valuer. The related statutory revaluation reserves which have been recorded directly in equity are RON 27,689,000 or €7,670,000. If the revaluation reserves were to be distributed to the shareholders income tax of RON 4,430,000 or €1,227,000 is payable upon such distribution based on the current income tax rate of 16 per cent..
11. Related party transactions
For the purposes of these financial statements, a related party is an entity or entities who are able to exercise significant influence directly or indirectly on the Group's operations. Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note, however they are presented in the notes to the accounts which present Company only balances as well as those of the Group.
There is an investment management agreement between the ultimate parent of the company and Fabian Capital Limited for the day to day management of the Group. Mark Holdsworth is a director of both the company and Fabian Capital Limited.
The principal related party transactions which were carried out during the period are:
An investment management fee is payable to the Investment Manager, Fabian Capital Limited. Prior to AIM admission on 15 December 2006 the fee was calculated upon the basis of 2.5per cent. p.a. of the Net Asset Value of the Group. Since admission to AIM the fee is calculated as 2per cent. of Net Asset Value. Investment management fees are payable quarterly in advance. The fee for the period 1 January 2007 to 31 December 2007 amounted to €1,499,994 (2006: €588,038).
Fees paid to JTC Group Services Limited, the Group's administrators, amounted to €197,630 for the year ended 31 December 2007 (2006: €103,505) and have been charged to the income statement.
Stephen Burnett, Nigel Le Quesne, Philip Burgin and Nigel Syvret are Directors of both the Company and Jersey Trust Company. Directors' fees for the year were €174,823 (2006: €23,012).
Joint Venture Agreements
During the year ended 31 December 2007 the Group acquired a 50 per cent. investment in Coltex Invest Construct SRL, a Company domiciled in Romania. This investee was established for the purpose of developing and selling real estate projects. The shares were subscribed at a cost of €250 to each of the joint venturers. During the year the Group provided a loan of €1,610,000 to the joint venture (details of which can be found in note 10).
During the year ended 31 December 2007 the Group acquired 50 per cent. investment in SCD Fabian OSM S.A., a company domiciled in Romania. The investee was established for the purposes of developing and selling real estate projects. The shares were subscribed at a cost of €25,000 to each of the investors. At 31 December 2007 the company had not acquired any sites.
During the year ended 31 December 2006 the Group acquired a 50 per cent. investment in Phoenix Park S.R.L, a company domiciled in Romania. This investee was established for the purpose of developing and selling real estate residential projects. The purchase price as per the Share Transfer Agreement amounted to €5,750,000 which was financed entirely by means of a loan from Moulen Beleggingen BV, a Dutch company. The share transfer was effective on 28 July 2006.
During the year ended 31 December 2006 the Group acquired a 50 per cent. investment in AIG/Lincoln Lakeview S.a.r.L, a company domiciled in Luxembourg. This investee was established for the purpose of developing and selling real estate residential projects. The shares were subscribed at a cost of €12,500 to each of the investors. On 7 September 2006 the Group lent €5,125,000 to the joint ventures. Subsequent advances have been made and a repayment of the loan was made to the Group on 19 March 2007. Amounts outstanding to the Group as at 31 December 2007 amounted to €2,561,590.
12. Acquisition of subsidiaries
Year ended 31 December 2007
On 29 June 2007, Fabian Four S.R.L. acquired 100 per cent. of the share capital of Baneasa Business Center S.R.L. for a cash consideration of €12,006,791. The acquisition note is set out below.
This transaction has been accounted for using the purchase method of accounting.
| Book Value € | Fair value adjustment € | Fair Value € | |
| Net assets acquired | |||
| Investment property | 12,018,843 | 15,581,157 | 27,600,000 |
| Trade and other receivables | 98,712 | (24,538) | 74,174 |
| Cash and cash equivalents | 1,364,025 | - | 1,364,025 |
| Trade and other payables | (134,239) | - | (134,239) |
| Bank loans | (14,260,150) | 836,754 | (13,423,396) |
| Deferred tax liabilities | - | (2,629,768) | (2,629,768) |
| Total net assets | (912,809) | 13,763,605 | 12,850,796 |
| Excess in fair value over consideration paid | (844,005) | ||
| Total consideration | 12,006,791 | ||
| Satisfied by cash | 12,006,791 | ||
| Net cash flow arising on acquisition | |||
| Cash consideration | 12,006,791 | ||
| Cash and cash equivalent acquired | (1,364,025) | ||
| 10,642,766 |
From the date of acquisition to 31 December 2007, the acquisition contributed €1.3 million to turnover and an operating profit of €3.9 million after foreign exchange gains and interest.
If the acquisition had been made at the beginning of the financial year, Baneasa Business Centre would have contributed €2.6 million to turnover and made a profit of €7.8 million. This information takes into account foreign exchange gains and fair value adjustments and should not be viewed as indicative of the results of operations that would have occurred if the acquisitions had been made at the beginning of the year.
On 22 November 2007, Fabian Six S.R.L. acquired 100 per cent. of the share capital of S.C. C.H.F. Investitii S.R.L. for cash consideration of €5,237,524 The acquisition note is set out below.
This transaction has been accounted for using the purchase method of accounting.
| Book Value | Fair value adjustment | Fair Value | |
| € | € | € | |
| Net assets acquired | |||
| Investment property | 2,015,381 | 4,054,619 | 6,070,000 |
| Trade and other receivables | 326,983 | - | 326,983 |
| Cash and cash equivalents | 80,760 | - | 80,760 |
| Trade and other payables | (74,285) | - | (74,285) |
| Deferred tax liabilities | - | (648,739) | (648,739) |
| Total net assets | 2,348,839 | 3,405,880 | 5,754,719 |
| Excess in fair value over consideration paid | (517,195) | ||
| Total consideration | 5,237,524 | ||
| Satisfied by cash | 5,237,524 | ||
| Net cash flow arising on acquisition | |||
| Cash consideration | 5,237,524 | ||
| Cash and cash equivalent acquired | (80,760) | ||
| 5,156,764 |
Fabian Five, Six, Seven, Eight and Nine S.R.L were all incorporated during the year. On incorporation 100 per cent. of the share capital of these entities was acquired by the Group. At the date of acquisition the balance sheets of these entities consisted of share capital and a corresponding receivable owed in respect of share capital.
On 16 May 2007, Fabian Romania Limited purchased Topares Investments BV ("Topares") for €371,300. The name of Topares was subsequently changed to Fabian Finance BV. On 15 June 2007, a loan assignment agreement was entered into between a number of the Fabian Group companies and Moulen Bellingengen BV ("Moulen") transferring the relevant Moulen assets and liabilities to Fabian Finance BV for a net consideration of €88,172.
Year ended 31 December 2006
On 31 March 2006, Fabian One S.R.L acquired 100 per cent. of the issued share capital of Cascade Consulting Romania S.R.L. and 99.1 per cent. of Cascade Imobiliare Consult S.R.L. (the remaining 0.9 per cent. being acquired by the Company) for cash consideration of €7,514,723. This transaction has been accounted for using the purchase method of accounting.
| Book Value € | Fair value adjustment € | Fair Value € | |
| Net assets acquired | |||
| Property, plant and equipment | 6,637,431 | 5,462,569 | 12,100,000 |
| Deferred tax asset | 4,553 | - | 4,553 |
| Trade and other receivables | 17,668 | - | 17,668 |
| Cash and cash equivalents | 95,023 | - | 95,023 |
| Trade and other payables | (81,092) | - | (81,092) |
| Bank loans | (4,625,990) | - | (4,625,990) |
| Deferred tax liabilities | - | (874,011) | (874,011) |
| Total net assets | 2,047,593 | 4,588,558 | 6,636,151 |
| Net assets attributable to minority interests (being 0.9 per cent. investment attributable to the Company) | (32,969) | ||
| Net assets acquired by Fabian One S.R.L. | 6,603,182 | ||
| Goodwill | 1,006,563 | ||
| Total consideration | 7,609,745 | ||
| Satisfied by cash | 7,609,745 | ||
| Net cash flow arising on acquisition | |||
| Cash consideration | 7,609,745 | ||
| Cash and cash equivalent acquired | (95,023) | ||
| 7,514,722 | |||
13. Ultimate controlling party
In the Directors' opinion, there is no controlling party.
14. Commitments and contingencies
On 27 April 2007 Fabian Five S.R.L paid a deposit of €6,005,305 in respect of the acquisition of Cubic Centre Development S.R.L. Upon completion of construction, Fabian Five S.R.L is to pay the balance of the acquisition price. The acquisition price is determined by the level of lease income and a fix yield of 7.4 per cent.. The Directors have estimated the balancing payment to be €53,143,501 which the Directors intend to finance the majority through bank debt.
15. Earnings per share
The calculation of basic and diluted earnings per share at 31 December 2007 was based on the profit
attributable to ordinary shareholders of €6,080,469 (2006:€1,384,752) and a weighted average number of shares of 50,831,130 (2006: 22,581,510).
16. Subsequent events
On 7 March 2008, the Company completed the acquisition of 100 per cent. of HIL Investitii & Constructii S.R.L which has a site on Dacia Boulevard at an acquisition price for €4,893,923 of which €2,143,923 has been paid to date. Of the remaining balance €150,000 will be paid after completion of the financial due diligence and €2,600,000 will be paid at completion of construction which is expected to be in quarter two of 2010.
On 28 May 2008, the Company completed the acquisition of 50 per cent. in a joint venture, SCD Fabian OSM (incorporated in Luxembourg), which acquired two sites known as Oradea and Satu Mare and located in western Romania. The acquisition price of the two sites amounts to €3,125,000.
The directors of Fabian Romania Limited accept responsibility for the information contained in this announcement. To the best of the knowledge and belief of the directors of the Company (who have taken all reasonable care to ensure that such is the case) the information contained in this announcement is in accordance with the facts and does not omit anything likely to affect the import of such information.