» Annual Report

Annual Report

Posted on: 21 April 2008


Preliminary results for the period ended 31 December 2007

Chairman's report

New Europe Property Investments PLC was incorporated on July 23, 2007 and admitted to the AIM market of the London Stock Exchange on 22 August 2007.

The Company is managed by NEPI Investment Management Limited and invests primarily in the high quality office, retail and industrial property market initially in Romania, although in due course in other Central and Eastern European countries.

The Company's objective is to enable shareholders to invest in a dividend paying, long term closed-ended fund that could serve as a vehicle for institutional investors seeking exposure to Central and Eastern European investment opportunities offering stable absolute returns and portfolio diversification.

During the short period to 31 December 2007 a number of potential investment opportunities have been identified and considered, and two initial investments were made. Over this period the Group achieved weighted average distributable earnings per share of 2.26 Euro cents equivalent to a 3.2% return on invested capital on an annualised basis. In the circumstances, and given the high level of cash balances, your Board considers this performance to be satisfactory and propose a dividend for the period of 1.24 Euro cents per share. Since the year end the Company has concluded two additional acquisitions. Further details of these transactions are set out in the Directors' report below.

Despite current general uncertainties in markets, your Board consider that the solid foundations that have now been laid, the management team that is in place and the ability to raise further capital should this be desirable have put the Company in a strong position to take advantage of attractive investment opportunities as they arise.




Directors' report

Property Acquisitions

Two investments were made during the four months of operation in the 2007 financial year.

The first acquisition, a portfolio of four properties located in Bucharest, Iasi, Bacau and Brasov, was concluded on October 19, 2007 for a total consideration of €11.8 million. The properties were acquired from Flamingo International SRL and Flanco International SRL at a composite yield of 8.6%. The tenants include US Food Network SA, Aura Gaming International SRL, Banca Comerciala Romana SA (BCR), Piraeus Bank Romania SA and Flanco International SRL. US Food Network SA is the local franchise operator of the KFC fast food chain, Aura Gaming International is a Russian casino operator, BCR is the largest Romanian bank by assets (currently owned by Erste Bank of Austria), Piraeus Bank is part of the Piraeus Bank Group of Greece and Flanco International, the seller of the portfolio, is a large household electronics retailer listed on the Bucharest stock exchange. The lease terms on the properties have a weighted average of 8 years (before break options). The acquisition was funded fully with equity. The second acquisition, an industrial warehouse and office facility located in Rasnov, was concluded on December 13, 2007 for a total consideration of €15.7 million. The property was acquired from Hi-Lo Sisteme de Depozitare SRL at a composite yield of 7.75%. The tenants include PsiControl Mechatronics, a member of the Picanol Group listed on the Euronext Brussels stock exchange and Hi-Lo, the seller of the portfolio, which is a British local manufacturer of industrial and retail metallic storage systems. The lease term is a weighted average of 13 years (before break options). The acquisition was funded fully with equity.

The second acquisition, an industrial warehouse and office facility located in Rasnov, was concluded on December 13, 2007 for a total consideration of €15.7 million. The property was acquired from Hi-Lo Sisteme de Depozitare SRL at a composite yield of 7.75%. The tenants include PsiControl Mechatronics, a member of the Picanol Group listed on the Euronext Brussels stock exchange and Hi-Lo, the seller of the portfolio, which is a British local manufacturer of industrial and retail metallic storage systems. The lease term is a weighted average of 13 years (before break options). The acquisition was funded fully with equity.

Further acquisitions

The investment advisor had identified in excess of €100 million worth of additional potentially suitable acquisitions towards the end of the financial period. These acquisitions have been pursued in the first months of 2008 and as at the date of this report, two acquisitions have been completed.

On February 8, 2008 the Group concluded the acquisition of General Investment SRL and General Building Management SRL, together owning a portfolio of buildings in 18 cities in Romania from Oeanis International BV (part of the Avrig Group; Avrig is a shareholder in the Investment Manager) at a weighted yield of 7.6%. The acquisition for a maximum total consideration of €46 million was part funded with a €14 million seven year loan from Eurohypo AG. The portfolio is expected to generate €3.6 million in annual revenue when fully occupied. Raiffeisen Bank SA, the 3rd largest bank (by total assets) operating in Romania, is the main tenant of the portfolio and will account for approximately 55% of the rented area when the portfolio is fully let. The lease agreement with Raifffeisen Bank has 6 years remaining and the tenant has the option to vacate one of the locations by giving 12 months' notice. The remaining office and retail area of the portfolio is rented to various local and international businesses, including fund managers, banks and professional associations. The vendor has provided a 4 year rental guarantee in respect of the tenants other than Raiffeisen Bank.

On April 8, 2008 the Company concluded an agreement for the Group to partner with CIREF Europe Ltd (CIREF) in the acquisition of a portfolio consisting of 6 properties in Germany. CIREF is an investment and development fund, listed on the AIM market of the London Stock Exchange with its primary focus being the UK market, with emphasis on investments and developments in the retail sector. The German portfolio comprises mainly retail and office properties in Leipzig, Bruckmuehl, Eilenberg, Frankfurt, Moelln and Munich. The tenants of the portfolio include the Norma, Rewe and Plus supermarket chains, the Hagebau do-it-yourself store and various medical practitioners. The property in Moelln includes a number of high demand residential units which generate under 4% of the total portfolio's revenue. The properties have a weighted average remaining lease term of approximately 7 years. The total consideration to be paid by the Company for the 50% interest in the portfolio is approximately €16.9 million, of which €14 million will be funded by a seven year bank loan. The net annual rent for the Company's share of the portfolio is expected to be €2.4 million, representing a yield on purchase price of approximately 7.2%.

Financial Performance

The Group achieved a weighted average distributable earnings per share of 2.26 Euro cents in respect of the 2007 financial period, representing an annualised return on invested capital of 3.2%. Earnings were diluted by relatively large cash balances held during 2007. However, the cash balances stood the Group in good stead to make the above acquisitions in the early part of the 2008 financial year.

Statutory Information

As at the admission date, the Company had issued 12,877,200 shares at €2 per share resulting in €25.7 million of capital less listing expenses. A further 13,917,800 of shares were issued on December 14, 2007 at €2 per share pursuant to the capital commitments made by the investors at admission date.

Dividend

The Board has decided to declare a dividend of 1.24 Euro cents per share in respect of the 2007 financial period. The declaration is subject to shareholder approval at the annual general meeting scheduled for 13 May 2008 and the dividend payment is expected to take place on 16 May 2008 to shareholders on the register at 2 May 2008.

Prospects

The Group has established a solid foundation, was debt free at year end and is well positioned to take advantage of what it considers to be an improved investor's environment in its markets in 2008.

Directors

The Directors who served during the period and to date were:

Director Appointment Date
Peter Franis Gray - Non-executive Chairman August 14, 2007
Michael John Mills - Non-executive Director August 13, 2007
Dewald Lambertus Joubert - Non-executive Director July 23, 2007
Martin Johannes Christoffel Slabbert - Non-executive Director August 14, 2007
Corneliu Dan Pascariu - Non-executive Director November 26, 2007
Company Secretary
Secretary Appointment Date
Cornelius Eduard Cassell July 23, 2007
Director's Interests

Mr. Martin Slabbert, non-executive director, has an indirect beneficial interest in the Company of 197,500 shares subscribed for by his wife, Madeleine Slabbert.

None of the other directors hold a beneficial interest in the Company.

Auditors

Subsequent to the year end, the Auditors, KPMG Audit LLC, were appointed and, being eligible, have expressed their willingness to continue in office.

Balance sheet at 31 December 2007
  Note 2007 €
ASSETS
Non-current assets
Investment property 3 21,718,364
  21,718,364
Current Assets
Trade and other receivables   142,793
Cash and cash equivalents   33,651,107
  33,793,900
Total assets   55,512,264
 
EQUITY AND LIABILITIES
Total equity attributable to equity holders
Share capital 4 267,950
Share premium 4 52,487,190
Currency translation reserve   22,633
Retained earnings   275,746
  53,053,519
Total liabilities   2,458,745
 
Non-current liabilities    
Deferred tax   56,767
 
Current liabilities  
Trade and other payables 5 2,401,978
Total equity and liabilities   55,512,264
INCOME STATEMENT - for the period ended 31 December 2007
Note 2007
Net rental and related income
Recoveries and contractual rental income   343,790
Property operating expenses   (21,773)
  322,017
 
Administrative expenses   (243,635)
Profit before net finance income   78,382
Net finance income    
Finance income - interest from bank desposits   255,362
Earnings before tax   333,744
Tax expense   (57,998)
Earnings after tax   275,746
Basic weighted average earnings per share (cents) 6 1.88
Diluted weighted average earnings per share (cents) 6 1.88
Distributable earnings per share 6 1.24

The Directors consider that all results derive from continuing activities.

Statement of Changes in Equity for the period ended 31 December 2007
Share
capital
Share
premium
Currency
translation
reserves
Retained
Earnings
Total
Opening balance - - - - -
Issue of shares          
- Issue of 12 877 200 shares on 23 August 2007 128,772 25,625,628 - - 25,754,400
- Issue of 13 917 800 shares on 14 December 2007 139,178 27,696,422 - - 27,835,600
267,950 53,322,050 - - 53,590,000
Foreign exchange gain - - 22,633 - 22,633
Total recognised income and expense
- issue costs recognised directly in equity - (834,860) - - (834,860)
- profit for the year - - - 275,746 275,746
- (834,860) - 275,746 (559,113)
Balance at 31 December 2007 267,950 52,487,190 22,633 275,746 53,053,519
Cash flow statement for the period ended 31 December 2007
2007
Operating activities
Cash generated from operations 2,614,331
2,614,331
Investing activities
Acquisition of investment property (21,718,364)
(21,718,364)
Financing activities
Raising capital 52,755,140
Cash inflow from financing activities 52,755,140
Increase in cash and cash equivalents 33,651,107
Cash and cash equivalents at beginning of period -
Cash and cash equivalents at end of period 33,651,107
Cash and cash equivalents consist of:
Current accounts 33,651,107
Notes to the annual financial statements for the period ended 31 December 2007
1. General

New Europe Property Investments PLC (the Company) is a company on 23 July 2007. The Group includes the Company and its wholly owned subsidiaries.

2. Accounting policies

The financial statements have been prepared in accordance with applicable Isle of Man law and International Financial Reporting Standards (IFRS). The principal accounting policies applied in the preparation of the financial information set out in this announcement are set out in the Company's full financial statements for the period ended 31 December 2007.

3. Investment property
2007
Carrying value at beginning of period -
Additions 21,152,231
Capitalised expenditures 566,133
Disposals -
Revaluation adjustment -
21,718,364

Investment property is carried at fair value. As the properties were purchased close to the period end, the cost of these is deemed to be the fair value, with no requirement for an independent valuation so soon after purchase.

The Group's investment properties at the end of the reporting period included office, retail and industrial properties.

A register of investment property is available for inspection at the registered office of the Company.

There are no restrictions on the ability of the Group to realise its investment property.

4 Share capital and share premium
2007
Authorised 150 000 000 ordinary shares of € 0.01 each 1,500,000
Issued 26 795 000 ordinary shares at € 0.01 each 267,950
Share premium 52,487,190

The Ordinary Shares carry the right to vote at general meetings, the right to dividends, and the right to the surplus assets of the Company on a winding-up.

The Ordinary Shares carry pre-emption rights as well as transfer rights as indicated in the Company's Admission Document published at the time of admission to the AIM Market of the London Stock Exchange.

5 Trade and other payables
2007
Investment property (retentions from purchase price) 1,965,383
Investment property - acquisition related expenses 180,658
Prepaid rentals / deposits 73,410
Accrued management fees 33,804
Accrued recoverable property expenses 20,471
Accrued expenses 127,021
2,401,978
6 Earnings per share

The calculation of basic and diluted earnings per share at 31 December 2007 was based on the profit attributable to equity holders of € 275,746 and a weighted average number of ordinary shares outstanding of 14,686,514. Diluted earnings per share are the same as basic earnings per share, as there are no dilutory instruments in issue.

The weighted average number of shares is based on the following information:
Date Event Number
of shares
% of period Weighted
Average
23/08/2007 share issue 12,877,200 87% 11,203,164
14/12/2007 share issue 26,795,000 13% 3,483,350
31/12/2007 period end 14,686,514

The calculations for weighted distributable earnings per share and distributable earnings per share are based on the profit distributable to equity holders plus deferred tax, as indicated below.

Earnings after tax 275,746
Deferred tax 56,767
Distributable earnings 332,514
Weighted average number of shares during the period 14,686,514
Weighted average distributable earnings per share (cents) 2.26
Number of shares in issue at end of period 26,795,000
Distributable earnings per share (cents) 1.24
7 Subsequent events

Subsequent to year end the Company completed two further transactions, as detailed below.

Acquisition of two companies holding a portfolio of 18 properties in Romania

The Group has concluded a sale and purchase agreement to acquire two companies for a maximum consideration of approximately €46.3 million, namely General Investment SRL and General Building Management SRL ("the Property Companies"), which together own a portfolio of 18 properties, situated in various cities in Romania. The buildings comprise 47,379m2 of lettable space, of which 32,352m2 is currently subject to rental contracts, as well as 4,800m2 of space which is currently under refurbishment. The vendor is responsible for the costs of refurbishment and has granted extensive income and rental warrantees over 36 and 48 month periods respectively. Assuming vacant space and space currently under renovation is fully rented, the annual net operating income generated by the properties is expected to be approximately €3.6 million, the equivalent of a purchase yield of 7.78%.

For the year ended 31 December 2007, the Property Companies made a loss of approximately €0.7 million in accordance with statutory Romanian accounting standards and the aggregate net asset values of these companies under Romanian accounting principles as at 31 December 2007 was approximately €9.85 million.

The vendor of the companies was Central Eastern European Real Estate Shareholdings BV, part of the Avrig 35 Group ("Avrig"). Avrig is also a 20% shareholder in the Company's investment advisor and one of Avrig's directors is also a director of the Company's investment advisor. Only the independent directors of the Company's investment advisor advised the Company on the transaction. Dan Pascariu, one of the Company's directors, is also a minority shareholder in Avrig 35. Mr Pascariu did not participate in the Board discussions on the transaction and abstained from voting on the transaction.

The final purchase price payable is dependent on the net rental income generated by the properties. Of the total debt free purchase price of approximately €46.3, an amount of €42.3 million was payable on completion and the balance is payable on the satisfaction of certain conditions being met by the vendor. Of the consideration paid on completion, approximately €14 million was funded by a seven year loan from Eurohypo AG bank to General Investment SRL, and the balance of €28.3 million from the Company's existing cash resources. The deferred element of the consideration payable of approximately €4 million will be met using either the Company's own cash resources or bank finance which the Company is confident it will be able to obtain prior to such deferred consideration
becoming due.

There is uncertainty as to the ownership status of the property in Constanta. The Company has a put option against the vendor to sell the Constanta property to the vendor should the ownership issue not be resolved by 31 December 2008.

The effective date of the transaction was 1 January 2008

A 50% partnership in the acquisition of two companies holding a portfolio of 6 properties in Germany

The Company has concluded an agreement for the Group to acquire 50% of a portfolio comprising four retail centres, a medical office facility and a mixed use retail and residential property (the "Portfolio") for a total consideration of €16.9 million, net of acquisition costs and including €14.9 million of debt (of which approximately €0.9 million is vendor finance).

The retail centres are situated in Leipzig, Bruckmuehl, Eilenberg and Frankfurt (all in Germany). The shopping centre in Leipzig has a total site area of 12,712 sq m with a total lettable area of 5,864 sq m with 300 parking bays. The Bruckmuehl property has a total site area of 15,941 sq m and the building has a total lettable area of 5,899 sq m with 200 parking bays. The Eilenberg property has a total site area of 15,000 sq m and the building has a total lettable area of 3,727 sq m with 200 parking bays. The Frankfurt property has a total site area of 1,652 sq m and lettable area of 1,093 sq m. The medical centre is located in Munich in Germany - the six storey building has a total site area of 491 sq m with a total lettable area of 2,360 sq m. The mixed retail and residential property is located in Moelln and has a site area of 10,111 sq m, a lettable area of 5,510 sq m and 150 parking bays.

The vendor has agreed to provide an interest free loan by deferring payment of €1.7 million of the purchase price for 100% of the Portfolio (i.e. approximately €0.9 million of the price payable by the Company) for a period of five years. The balance of the price payable by the Company will be paid to the vendor in cash, funded in part by a seven year loan of €14 million from Nord LB, with the remainder of the consideration being paid from the Company's existing cash resources. The total net annual rent for the Portfolio is expected to be approximately €2.4 million (the Company's share therefore being €1.2 million), representing a yield on purchase price of approximately 7.22%.

The Directors are not aware of any other events subsequent to 31 December 2007, not arising in the normal course of business, which are likely to have a material effect on the financial information contained in this report, other than as disclosed herein.

8. The financial information set out in this announcement does not constitute statutory accounts but has been extracted from the Group's financial statements which have not yet been delivered to the Registrar. The Group's annual report and Financial Statements will be posted to shareholders shortly. Further copies will be available from the Company's registered office: Falcon Cliff, Palace Road, Douglas, Isle of Man IM1 4LB.