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Hepsor AS: 2022 III quarter and nine months consolidated unaudited interim report

HEPSOR AS
HEPSOR AS

The consolidated sales revenue of Hepsor for the first nine months of 2022 amounted to 5.6 million euros (including 1.7 million euros in Q3 2022) and the net loss was 0.1 million euros (including a net profit of 0.1 million euros in Q3 2022).

The Group’s revenues and profitability are directly dependent on the development cycle of projects, which is approximately 24 to 36 months. Sales revenue is only generated at the end of the cycle. Calendar quarters vary in terms of the number of projects ending during the quarter, which is why both profits and sales revenue can differ significantly across quarters. Therefore, performance can be considerably weaker or stronger in some years and quarters than in others. To assess the overall sustainability and economic results of a real estate development company, the portfolio of the company’s development projects and three-year average financial results are better criteria for assessing the group’s performance.

The sales revenue in the first nine months of this year was generated mainly from the sale of completed residential development projects. As of the end of third quarter, we have sold 39 apartments from completed projects in Latvia, including 20 apartments at 4b Strēlnieku St, 18 apartments at 9 Baložu St and 1 apartment at 24 Āgenskalna St. In the third quarter, we signed real right contracts for all 76 apartments in the Priisle Kodu development project. The Group owns a 25% stake in the Priisle Kodu development company Hepsor N170, and therefore project sales are not reflected in the consolidated sales revenue. The share in the profit from the Priisle Kodu development project will be reflected in the Group’s results for the third and fourth quarters of 2022.

Hepsor has four residential development projects in Estonia and Latvia, with a total of 405 new apartments. As of 14 October 2022, contracts under the law of obligations and reservation agreements have been signed for 55 apartments (60%) in the Mārupes Dārzs development project (92 apartments) near Riga. In the Kuldīgas Parks (116 apartments) project in Riga, contracts have been signed for 78 apartments (67%). Both projects will be completed in 2023. In Estonia, we continue with the construction of the Paevälja Hoovimajad development project, which includes two apartment buildings with a total of 96 apartments. As of 14 October 2022, contracts under the law of obligations have been signed for 79 apartments (82%). The first phase of the project with 48 apartments will be completed by the end of this year, and the second phase in Q1 2023. In regard to new development projects, we started the construction of Ojakalda Kodud in the third quarter, where we will build 101 spacious new family apartments.

In addition to residential development projects already under construction and for sale, Hepsor plans to start constructing 218 new apartments in Q4 2022, including Lilleküla Kodud (26 apartments) and 7 Manufaktuuri St (154 apartments) in Tallinn, and Nameja Rezidence (38 apartments) in Riga.

Of commercial property developments, four projects have been completed or are about to be completed this year in Tallinn and Riga, all of which are fully covered by lease agreements. We built commercial premises on the business property at 1 Priisle St, which is now leased to the Selver supermarket (leased area approx. 1500 sq. m). The real right contract for selling the property is planned to be signed in the fourth quarter of this year. The green office building Grüne Maja is largely in active use, and the last tenants will move to the new premises in Q2 2023 at the latest. At the end of the year, we will hand over the Büroo113 commercial building, which is 100% covered by lease agreements, and the anchor tenant will be a modern clinic with an innovative concept. Büroo113 is the first building where green solutions (geothermal heating and cooling, rainwater use, energy-efficient architecture, excellent indoor climate, solar energy, etc.) have been applied in a city centre high-rise. In Riga, a stock office type commercial building will be completed at 30 Ulbrokas St in Q4 2022.

In total, the Group has added approximately 156 apartments to its development portfolio in the third quarter, including 40 in Riga and 116 in Tallinn. Approximately 45 new apartments will be built on the 12 Manufaktuuri St property in the Manufaktuuri Quarter together with our long-term cooperation partner Tolaram Grup. The Group plans to start the construction of 26 apartments in the Lilleküla Kodud development project already this year. Up to 45 apartments can be built on the properties purchased at 1a Alvari St and 5 Alvari St. In Latvia, a property was added at Jūrmalas Gatve, where an energy class A three-storey residential building with 40 apartments is planned to be built.

In the spring of 2020, Covid-19 and the subsequent lockdown affected the activity of the real estate market rather briefly, and the number of transactions and market activity recovered in a matter of a few calendar quarters. The impact on the Estonian real estate market of Russia’s military invasion of Ukraine, which began on 24 February 2022, has also so far been modest.

Today, it is clear that the war in Europe, the accelerated energy crisis, strong inflation and the rise in interest rates do not allow for an objective assessment of the combined impact of all these factors on Hepsor’s home markets and consumer confidence, or a prediction of when the activity of the real estate market might recover.

Adjusted Forecasts

The Group’s management has decided to change the previously published financial forecasts for the financial years 2022 to 2024.

The main reasons for adjusting the forecasts are the changes in the economic environment (cooling of the real estate market) and the extension of the deadlines for issuing building permits (problems in the national building register, delays due to the work overload of municipal officials).

Changes in the economic environment are manifested in the real estate market as significantly decreased transaction activity and pressure on margins. We forecast that transaction activity in the residential property market will not start to recover until the end of Q2 2023. Whether we will see the recovery of the transaction activity in the residential market in Q3 2023, and what the speed and extent of the recovery will be, depends on how hard the winter heating season affects household budgets (energy prices) and how the situation in Ukraine changes (affecting general consumer confidence).

The basic premise of Hepsor’s adjusted forecast is that the transaction activity of the residential property market in both Estonia and Latvia will reach a level similar to late 2021 in the second half of 2024.

At the moment, Hepsor does not predict the pace of the recovery of transaction activity in the commercial property market, but assumes that completed commercial buildings will be rented out and kept on the developer’s balance sheet until the market allows them to be sold at attractive price levels.

The financial forecast for the current financial year has changed the most due to the following circumstances.

  • Hepsor’s management decided not to sell any of the three commercial buildings under construction (Büroo113, Grüne Maja, 30 Ulbrokas St). We will only consider selling these commercial buildings if there is an attractive offer. The buildings to be completed are all fully covered by lease contracts, Hepsor considers the quality of the signed leases to be very good, the buildings were built based on a sound future-oriented concept (green houses) and the developer sees no reason to sell the houses in a down market phase. We prefer to earn rental income and sell the houses when the market recovers. This decision will significantly affect the sales and profitability figures for 2022.

  • Since the transaction activity of the residential market has decreased, we do not expect to sell all the apartments at 4b Strelnieku in Riga by the end of the year. At the same time, all the unsold apartments in this project are rented and earning rental income. This decision has some impact on the sales and profitability figures for 2022.

  • The assumption behind the new forecast for 2022 is that real right contracts can be signed for 48 apartments in the Paevälja Hoovimajad project by the end of the year (i.e. 50% of the total sales volume of the project). As most of the real right contracts will be signed in December, it is equally possible that their eventual number will be higher or lower than forecast (79 apartments are covered by contracts under the law of obligations). If real right contracts cannot be signed in December for all the apartments mentioned in the forecast, the sales revenue from these apartments will move forward by a few weeks to January 2023.

The main reason for the adjustment of the forecasts for 2023 and 2024 financial year, in addition to the slowed real estate market, is the fact that the building permit procedure for major development projects has taken significantly longer than previously expected. Since the start of construction has shifted, the completion of the buildings and the generation of related sales income has also move forward in time.

We have conservatively assumed that the recovery of transaction activity in the residential market will not be fast (recovery will take place in the second half of 2024), and this in turn will negatively affect the sales periods of our apartments and also profitability (pressure on margins).

We are conservative in our forecasts, but at the same time we believe that difficult times and changing business cycles can bring new opportunities and interesting purchases to grow the development portfolio.

Consolidated statement of financial position

in thousands of euros

30 September 2022

31 December
2021

30 September 2021

Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents

3,110

10,889

1,571

Trade and other receivables

1,596

652

710

Current loan receivables

100

2,388

29

Inventories

67,118

37,237

35,925

Total current assets

71,924

51,166

38,235

Non-current assets

 

 

 

Property, plant and equipment

230

229

373

Intangible assets

2

0

0

Financial investments

2

402

2

Investments in associates

209

0

0

Non-current loan receivables

1,766

3,408

2,706

Other non-current receivables

167

140

140

Total non-current assets

2,376

4,179

3,221

Total assets

74,300

55,345

41,456

Liabilities and equity

 

 

 

Current liabilities

 

 

 

Loans and borrowings

2,445

5,501

4,256

Current lease liabilities

33

123

36

Prepayments from customers

3,497

1,164

1,974

Trade and other payables

3,213

5,539

1,917

Deferred income tax liability

0

0

105

Total current liabilities

9,188

12,327

8,288

Non-current liabilities

 

 

 

Loans and borrowings

43,322

22,862

22,192

Non-current lease liabilities

66

66

284

Other non-current liabilities

2,692

1,053

1,372

Total non-current liabilities

46,080

23,981

23,848

Total liabilities

55,268

36,308

32,136

Equity

 

 

 

Share capital

3,855

3,855

6

Share premium

8,917

8,917

3,211

Retained earnings

6,260

6,265

6,103

Total equity

19,032

19,037

9,320

incl. total equity attributable to owners of the parent

18,529

18,904

9,196

incl. non-controlling interest

503

133

124

Total liabilities and equity

74,300

55,345

41,456

Consolidated statement of profit and loss and other comprehensive income

in thousands of euros

9M 2022

9M 2021

Q3 2022

Q3 2021   

 

 

 

 

 

Revenue

5,622

6,946

1,668

3,072

Cost of sales (-)

-5,100

-5,791

-1,348

-2,501

Gross profit

522

1,155

320

571

Marketing expenses (-)

-279

-177

-106

-77

Administrative expenses (-)

-764

-569

-227

-271

Other operating income

47

56

0

13

Other operating expenses (-)

-45

-49

-6

0

Operating profit (-loss) of the year

-519

416

-19

236

Financial income

849

146

282

71

Financial expenses (-)

-454

-319

-142

-127

Profit before tax

-124

243

121

180

Current income tax

-5

-16

0

0

Deferred income tax

0

-45

8

-32

Net profit for the year

-129

182

129

148

Attributable to owners of the parent

-141

-175

132

-91

Non-controlling interest

12

357

-3

239

 

 

 

 

 

Other comprehensive income (-loss)

 

 

 

 

Changes related to change of ownership

135

70

0

70

Change in value of embedded derivatives with minority shareholders

18

-426

31

-395

Other comprehensive income (-loss) for the period

153

-356

31

-325

Attributable to owners of the parent

-234

68

52

68

Non-controlling interest

387

-424

-21

-393

 

 

 

 

 

Comprehensive income (-loss) for the period

24

-174

160

-177

Attributable to owners of the parent

-375

-107

184

-23

Non-controlling interest

399

-67

-24

-154

 

 

 

 

 

Earnings per share

 

 

 

 

Basic (euros per share)

-0.07

-0.05

-0.04

-0.02

Diluted (euros per share)

-0.07

-0.05

-0.04

-0.02

Anneli Simm
Head of Investor Relations
Phone: +372 5615 7170
e-mail: anneli@hepsor.ee

Hepsor AS (www.hepsor.ee/en/) is one of the fastest growing residential and commercial real estate developers in Estonia and Latvia. Over the last eleven years Hepsor has developed more than 1,400 homes and 24,000 m2 of commercial space. Hepsor has been the first real estate developer in the Baltic States to implement a number of innovative engineering solutions that make the buildings we construct more energy-efficient and thus more environmentally friendly. The company's portfolio is comprised of 27 development projects with a total sellable space of 180,000 m2.

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