Arricano Annual Report 2018 Annual Report 2018 Arricano is one of the leading real estate developers and operators of shopping centres in Ukraine. Today, Arricano owns and operates five completed shopping centres comprising 147,300 sq.m of gross leasable area, a 49.97% shareholding in Assofit and land for a further three sites under development. Our Portfolio at a Glance Strategic Report 2018 Highlights 1 Completed Portfolio Chairman’s Statement 2 Consisting of five shopping centres located in the cities Chief Executive Officer’s Report 4 of Kryvyi Rih, Zaporizhzhia, Simferopol and Kyiv. Spread over 147,300 square metres offering consumers a range Operating Portfolio 6 of domestic and international retail brands. Finance Report 12 Directors’ Report Read more: Page 6 Management Report 14 Management Analysis Development Properties of Corporate Governance 18 Following the IPO on AIM, the Company acquired four Board of Directors 20 development sites for approximately USD 66 million, Senior Management 22 one of which was completed and three are at different stages of development. Two are located in Kyiv and Audit Committee Report 24 one is in Odesa. Remuneration Committee Report 25 Read more: Financial Statements Page 11 Independent Auditor’s Report 26 Investment Consolidated Statement of Financial Position 29 49.9 per cent shareholding in Assofit, ex-holding company of Sky Mall, one of Kyiv’s largest shopping Consolidated Statement of Profit or Loss centres, home to a range of leading retail brands and other Comprehensive Income 31 including H&M, Zara, Topshop and Comfy. Consolidated Statement of Cash Flows 32 Consolidated Statement of Changes in Equity 33 Read more: Notes to the Consolidated Page 68 Financial Statements 34 2018 Highlights • Recurring revenues increased by 14% to USD 31.5 million • As at 31 December 2018, total borrowings down Strategic Report (2017: USD 27.5 million) by 2 % to USD 96.5 million (2017: USD 98.7 million) • Net operating income (excluding revaluation gains) increased • Net asset value increased by 80% to USD 94.0 million by 19% to USD 20.9 million (2017: USD 17.6 million) as at 31 December 2018 (2017: USD 52.2 million) • 17% uplift in the valuation of the Company’s • New Board appointments: Urmas Somelar as a Non- portfolio to USD 258.5 million as at 31 December 2018 executive Chairman; and Frank Lewis as an Independent (2017: USD 221.3 million) Non-executive Director. • Very nearly fully let with occupancy rates for 2018 Post year-end increasing to 99.70% against 98.65% in 2017 • Post year-end secured new USD 5.15 million loan facility Directors’ Report with Raiffeisen Bank Aval JSC, to finance in part the • As at 31 December 2018, total bank borrowings down construction of the Lukyanivka shopping and entertainment by 16% to USD 36.3 million (2017: USD 43.1 million) centre in Kyiv. Revenue Vacancy rate Footfall (in mln USD) (in % from total GLA) (mln visitors) Financial Statements USD 31.5m 0.3% 47.8m 47.8 31.5 10.7 45.2 27.5 39.3 38.0 22.8 23.1 20.4 22.3 3.8 1.7 1.3 0.3 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Net Asset Value (NAV) Net Operating Income (NOI) Earnings per share (EPS) (in mln USD) (in mln USD, excl. revaluation gains and (in USD per share) allowance for bad debts) USD 94.0m USD 20.9m USD 0.37 0.37 94.0 0.25 20.9 0.20 17.6 61.7 15.9 52.2 13.1 10.8 -0.20 24.2 3.1 -0.76 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Arricano Annual Report 2018 1 Chairman’s Statement 2018 saw Arricano increase rental income by 15% to USD 25.6 million and grow net operating income by 19% to USD 20.9 million. This would be a good performance by a mature business in a stable market environment; given the context of achieving it against the challenges facing businesses in the Ukraine, it is an excellent performance and builds upon a similarly strong performance in the prior year. Urmas Somelar Non-Executive Chairman 2 Arricano Annual Report 2018 Whilst the social and economic conditions to 99.7%, up from 98.7% at 31 December 2018, Strategic Report continue to be challenging, the Group has demonstrating Arricano’s ability to both attract Visitors performed strongly relative to domestic peers. new and keep existing tenants. In 2018, the In particular, Arricano has differentiated itself Company signed 137 new lease agreements by continuing to develop the portfolio, expanding relating to 20,157 sq.m of retail space. in 2014 through the opening of the Prospekt Mall 47.8m and more recently securing a new loan in February As at 31 December 2018, Arricano had over 2019 with Raiffeisen Bank Aval JSC to fund in part 147,300 sq.m of completed assets spread across +6% the development of the Lukyanivka site in Kyiv. five completed shopping centres. In addition, the Group also owns lease rights for 14 ha. of Across the Group’s shopping and entertainment development land divided into three specific centres the Group has continued to lead in sites which are at varying stages of development. Rental Income innovative marketing solutions and digital These are in Lukyanivka and Petrivka (both Kyiv), communications. As always, Arricano has sought as well as Rozumovska (Odesa). Directors’ Report to work collaboratively between consumer, retailer and landlord on the basis that sharing data openly Regarding the 49.97% shareholding in Assofit USD 25.6m will generate increased growth and customer Holdings Limited (‘Assofit’), a holding company, satisfaction. Trust and effective collaboration which held the Sky Mall shopping centre, the are at the heart of the multiple initiatives that Company continues to pursue Stockman Interhold +15% are ongoing across the portfolio. Marketing B2C S.A. (‘Stockman’) concerning its call option over strategy is focused on enhancing quality and the balance of the shares of Assofit. The Company We expect 2019 to be a good year for the Group. quantity of communication. Total media capacity announced in January 2018 that the High Court Arricano is now consistently profitable and we of malls in SMM channels is about 200 thousand of Justice in London (the ‘High Court’) had are again looking to expand the portfolio with followers with an average monthly reach more dismissed an application made by Stockman the development of the market leading and highly than 4 million people, which make the digital for permission to appeal the High Court’s earlier innovative Lukyanivka project. This, together with resources of the Group an efficient media platform judgement in which it had previously dismissed Financial Statements our ongoing success in increasing the consumer and communication tool. Stockman’s various challenges to the Fourth, Fifth appeal of our shopping centres, demonstrated and Seventh Awards (the ‘LCIA Awards’) rendered by the increase in visitor numbers and our success These efforts are reflected in the significant in the London Court of International Arbitration in working collaboratively with retailers both increase in visitor numbers achieved over the proceedings between Arricano and Stockman. physically and digitally, makes the Board year, up by 6% to 47.8 million visitors. The Group confident of delivering another strong trading is consistently achieving impressive increases in During 2018, Arricano was nominated for, and won performance in 2019. visitor numbers year on year and this is primarily a series of, industry awards reflecting the Group’s driven by the focus on making each shopping and leadership across multiple areas. Of particular Urmas Somelar entertainment centre a place which consumers note, was the achievements of Sun Gallery and Non-Executive Chairman want to visit not simply to shop at but also to City Mall in being winners at the VII National 16 April 2019 relax and socialise. Retail Award of Ukraine Retail Awards ‘Consumer Choice – 2018’, sponsored by PwC Ukraine. An important part of Arricano’s appeal is due to the retail mix in each centre. The management On behalf of the Board I would like to thank every team is focused on constantly refreshing the employee and stakeholder connected to Arricano retail mix so that each site continues to offer for their contribution and commitment to the new brands and experiences alongside keeping business during 2018 and I look forward to traditional favourites. The popularity of the working together towards achieving another shopping and entertainment centres means successful year in 2019. demand has remained strong. This is reflected in occupancy across the portfolio improving “ Arricano has delivered a very strong performance, increasing revenues and net operating income by 14% and 19%, respectively. The Group is in a stable position from which it is planning to expand and we expect 2019 will be another year of continued progress with a focus on working collaboratively with consumers visiting our shopping centres and our retail tenants. Arricano Annual Report 2018 3 Chief Executive Officer’s Report Arricano has now been consistently building momentum since addressing the challenges faced by all Ukrainian businesses in 2014. Despite the upheaval caused socially and economically, consumers have continued to come to our shopping and entertainment centres. In 2014, visitor numbers fell to 22.3 million then grew by over 20% p.a. to 47.8 million visitors in the year under review, demonstrating our recovery and the ongoing increasing popularity of our malls. Mykhailo Merkulov Chief Executive Officer 4 Arricano Annual Report 2018 This has come in part from our focus on making Bank debt at the year-end was USD 36.3 million As previously announced, we invested in an online Strategic Report our shopping and entertainment centres places down 16% from USD 43.1 million at the prior portal for tenants providing a broad range of tools where people want to come to, not just to shop at year end, with the majority of borrowings at the for tenants’ use from access to administrative but also to meet friends and relax.