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EQUEST BALKAN PROPERTIES PLC

INTERIM RESULTS 

FOR THE PERIOD ENDED 30 JUNE 2009 

Equest Balkan Properties plc ('EBP' / 'Company' / 'Group'), an Isle of Man registered company specialising in commercial property investments in the Balkan region, announces today its interim results for the period ended 30 June 2009.

Highlights at Mid Year 2009

• Net Asset Value per share of Euro 0.39 under IFRS, a decrease of 73% from 30 June 2008: Euro 1.45 (31 December 2008: Euro 0.92)

• Net Asset Value per share of Euro 0.37 under EPRA (European Public Real Estate Association), a decrease of 75% from 30 June 2008: Euro 1.51 (31 December 2008: Euro 0.92)

• Pre-tax loss of Euro 71.2 million (30 June 2008: pre-tax loss of Euro 9.0 million; 31 December 2008: pre-tax of Euro 64.3 million) 

• No dividend declared (31 December 2008: No dividend) 

• Total property assets of Euro 191.6 million, including Group's share in properties held by associates of Euro 48.6 million(30 June 2008: Euro 402.0 including Group's share in properties held by associates of Euro 52.3 million; 31 December 2008: Euro 262.9 million including Group's share in properties held by associates of Euro 50.2 million)

• Total net rental income of Euro 4.44 million (30 June 2008: Euro 4.95 million; 31 December 2008: Euro 11.46 million)

• Group cash balance of Euro 3.0 million (30 June 2008: 7.6 million: 31 December 2008: Euro 15.5 million) 

• Total borrowings (secured) of Euro 114.4 million and other (unsecured) loans of Euro 12.5 million, resulting in an overall gearing ratio of 70% (31 December 2008: 46%)

Post Period Highlights

• Cash balance at end of August of Euro 10.8 million of which approximately Euro 8.5 million is not secured by lenders and is available for use by the Group

• Euro 5.25 million net cash received from sale of Business Center Skopje, the EU Commission headquarter office building in the Macedonian capital

• Euro 1.2 million net cash received from sale of the Praktiker and Technomarket retail warehouses at Targoviste

• Euro 2.2 million cash drawn from debt facility with Raiffeissen Zentral Bank for Equest Logistic Center from which Euro 5.7 million remains available pending further leasing

• Restructuring agreed in principle to end joint ventures Archway and Aurora and to gain 100% ownership over five land parcels in Serbia at a cost of Euro 1.0 million payable by 31 December 2009

• Restructuring agreed and partial repayment of debt related to Serdika project

Commenting on the interim results, Charles Jillings, Non-executive Chairman of EBP, said:

'Our poor mid-year results reflect further reductions in the market value of our assets. The commercial real estate sector continues to decline. Investor activity is scarce, the mortgage markets are tight, and downward pressure on rents is now widespread. We are taking measures to improve our cash positions through asset sales, several of which completed in the post period, and will carefully use the cash to meet critical obligations in a timely manner.  Negotiations continue with Bank Austria regarding Moldova Mall and Vitantis.'  

For further information please contact:    

Chairman's Statement

Introduction

Our interim results reflect a severe deepening in the decline of the commercial property values in South East Europe. Half year losses for 2009 exceeded the losses incurred for the full year 2008. Unfortunately, there is no evidence yet suggesting that the cycle has reached its nadir in our markets though sentiment in some Western European real estate markets seems to be improving. 

Our objectives are unchanged: stability, profitability and return of capital if at all possible. We are focusing on asset sales, controlling costs, and conserving cash. While progress has been made, the market conditions are such that many challenges remain, particularly with respect to our tenants and bank financing. EBP's position remains weak.

We intend to frequently review our disposal plan in the context of our cash requirements. The Board believes the Company should sell assets until it has collected sufficient free cash to return to shareholders.  

Results

IFRS NAV decreased 58% to Euro 0.39 per share from Euro 0.92 at 31 December 2008.

In the six months to 30 June 2009, the Company made a pre tax loss of Euro 71.2 million (30 June 2008: pre-tax loss of Euro 9 million; 31 December 2008: pre-tax loss of Euro 64.3 million), including a revaluation loss of Euro 44.8 million (30 June 2008: revaluation loss of Euro 2.7 million; 31 December 2008: revaluation loss Euro 20.8 million) equating to a basic loss of Euro 0.49 per share (30 June 2008: loss of Euro 0.07 per share; 31 December 2008: loss Euro 0.44 per share).

Net rental income of Euro 4.44 million is slightly below expectations due to increasing vacancy levels and temporary rental concessions at Vitantis and Moldova Mall, together with slower than expected leasing at Equest Logistic Center.  

Portfolio

In terms of value, the property portfolio as at 30 June 2009 consisted of 75% investment and 25% development assets. Geographic diversification is relatively unchanged with 65% of assets held in Romania and the balance in Bulgaria, Serbia and Macedonia. 81% of the investment assets are in Romania with 15% in Bulgaria and 4% in Macedonia. The development assets are divided between Romania with 20%, Bulgaria with 30% and Serbia with 50%. 

In the future, the portfolio is likely to be increasingly concentrated in Romania in operational terms. Our experience in recent quarters has shown that rental revenues are particularly vulnerable to changes in the exchange rate of the Romania Lei, which has depreciated by about 20% against the Euro from its peak in 2008. The weakness of the Lei has made it harder for our retail tenants to operate profitably. Their rents are set in Euros and many tenants rely on sales of imported goods.

As a post period event, we sold Business Center Skopje, effectively exiting Macedonia. Serbian assets consist of the Apollo assemblage and a few much smaller land holdings. In Bulgaria, our investments are limited to Glorient, in which we hold a 40% stake, and part ownership of the Serdika site. The Serdika site is for sale and is currently attracting strong interest. The Apollo site is also being marketed for sale.

Valuations

The Shareholders agreed at the last Annual General Meeting that properties would not be appraised by professional valuers as has been the practice for previous interim results. This has resulted in a cost saving of Euro 125,000 in appraisal fees. The Directors did engage CB Richard Ellis ('CBRE') to give advice on capital value movements in the region, as well as considering other internal and external sources of information, before determining their valuation of the portfolio.

Overall, the Directors impaired portfolio values by approximately 30%, 25% and 20% for the Romanian, Bulgarian and Serbian assets respectively, compared to 31 December 2008 values. The asset in Macedonia was valued at its post period end sales price.

Costs

The Investment Manager has systematically reviewed property operating expenses and was able to negotiate some improvements in contract terms which have helped reduce service charges for tenants and has reduced non-recoverable expenses. The Board is also considering changing external property managers to further reduce costs.  

At the fund level, administrative expenses were Euro 3.1 million in the first half, reflecting some savings at the corporate level as well as lower investment manager's fees due on the smaller portfolio. The potential for further cost savings is being examined.

Financing / Funding

All of the Group's Euro 114.4 million of bank debt is on a non-recourse basis and secured individually by specific assets. There are no cross default provisions between facilities, though this has been requested by Bank Austria as part of the restructuring of the Moldova Mall and Vitantis loans. The bank debts will begin to mature in 2011, though, as a result of the declared event of default at Moldova Mall and Vitantis (which is subject to arbitration). These two loans are technically payable immediately. As a result, these debts have been reclassified to current liabilities in accordance with accounting standards. 

While cash balances totalled Euro 3.0 million at mid-year 2009, only Euro 1.8 million is available to the Group for general purposes. The balance is held at the operating company level in anticipation of interest and amortisation payments, for normal operating expenses, and in escrow or blocked accounts such as those controlled by Bank Austria until restructuring negotiations are concluded. 

Since 30 June 2009, we have drawn Euro 2.2 million from the facility for Equest Logistic Center, and collected Euro 5.25 million from the sale of Business Center Skopje. We have also paid down the unsecured facility related to Serdika by Euro 4.25 million. 

Hedging

Approximately 30% of our bank borrowings are not hedged against interest rate risk to maturity. Buying out our swap positions would cost approximately Euro 3.9 million.

Resignation of Non-executive Director

Andrzej Sobczak, the former Deputy Chief Executive of Carrousel Capital Ltd, which holds 36,995,000 ordinary shares (26.43%) in EBP, resigned as a Director of the Company effective from 29 May 2009.  

Going Concern

The Group continues to adopt a going concern basis for the preparation of these interim financial statements.

The Directors believe the Group will be able to successfully manage its business risks in the current challenging economic environment. After making enquiries and examining major areas which could give rise to significant financial exposures, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue their operations for the foreseeable future. The Group has primarily mortgage debt facilities secured at the local company level and collateralised only by specific assets. In the event of a financing default, each lender only has recourse to the borrower and not to the Company or other Group companies. Therefore, even in a distress situation, underperforming assets can be released back to the appropriate lender to limit the financial damage to the Group. With respect to the company's cash position, the Board has a reasonable expectation that sufficient liquidity will be available from a combination of existing cash reserves, draws on committed yet unfunded mortgage loans, net sales proceeds arising from the disposal program, cash flow from normal operations, periodic reimbursements of VAT, and interest income.

Change of Chairman

I have been Chairman of EBP since 23 July 2008 which is a role I intended to fill for a short time only. Accordingly, while remaining on the Board, I have decided to step down as Chairman and have proposed to the Board that I be succeeded by Donald Lake who is currently Deputy Chairman. I am pleased to say that Mr. Lake has agreed to accept the role and the Board has approved my proposal.

Outlook

The Board remains committed to a return to shareholders of equity capital in a tax efficient manner, including the buying back of shares, assuming asset sales can be completed at sufficiently high prices. This is not assured as investment yield expectations have increased and recovering significant amounts of the invested equity is currently problematic. 

We keep our disposal programme under frequent review in light of our cash needs and changes in market conditions. 

Charles Jillings

Non-executive Chairman

18 September 2009 

Investment Manager's Update

The investment management team has concentrated its efforts in recent months on asset sales and cash management, in addition to negotiating with our banks and joint venture partners. At the operational level we have been in constant dialogue with our tenants, many of whom have demanded rent reductions, and with our service providers to renegotiate contracts. 

Asset Sales

Since year end 2008 we have closed three sales, two of which were completed as post period end events, and have restructured the Archway and Aurora joint ventures.

In May 2009 the ownership transfer of a small retail land plot was completed. The transfer price was equal to the existing debt.  

In June 2009 the Group signed a restructuring agreement involving the joint ventures Archway and Aurora, which once consisted of twelve development properties in Serbia. When legally completed, the joint ventures will be cancelled which will result in the Group owing Euro 1.0 million by year end 2009 and having 100% ownership over five land parcels: Plot 34, Nis, Simanovci, Krusevac, and Eurosalon. 

In August 2009 the sale of Business Center Skopje was completed at a price of Euro 5.25 million, which equates to about a 15% yield for the new owner. The asset was unleveraged at the time of sale.

In August 2009 the Group sold the retail warehouses in Targoviste for Euro 4.3 million, with Euro 2.5 million of bank debt in place.

The Group is currently marketing for sale the Serdika site in Sofia and the Apollo assemblage in Old Belgrade. Further details on these efforts will be disclosed if and when sale purchase contracts are signed.  

Cash Management

The investment assets do not generate significant surplus cash, due to cash traps in place related to loan defaults (Vitantis, Moldova Mall), escrow requirements (Jules Michelet, Domenii, Casa Mosilor, Airport Smart) or occupancy levels (Equest Logistics Center). Targoviste and Business Center Skopje were cash generative, but both have been sold in the post period. Our land holdings (Apollo, Serdika, Archway, Ploesti, Euro Car Park) need periodic cash support for normal owner's expenses, such as property taxes, site security, and concession payments.  

The cash required for administrative expenses, investment management fees, and interest expenses on corporate level debt is satisfied from existing cash, draw-downs on committed financing related to Equest Logistic Center (dependant, in part, on occupancy levels), VAT reimbursements, and asset sales.

Looking forward, in January 2010, the Company is obligated to begin paying amortisation and interest payments for the Apollo project, a burden on cash flow expected to be Euro 3.5 million per annum.

Banking Issues 

Our negotiations with Bank Austria regarding the declared events of default at Moldova Mall and Vitantis have not yet yielded a final restructuring. The banking environment remains difficult, but as long as payments are being made and a dialogue maintained, the threat of foreclosure is considered by the Board to be minimised.

In the post period, we were able to draw Euro 2.2 million from the Raiffeisen Zentralbank Österreich AG ('RZB') facility following the successful letting of 9,151 sqm in Building 3 of Equest Logistic Center.

Market Conditions

Recent commercial market statistics for the Balkan region indicate that net absorption of commercial premises has slowed and there are not yet signs of improvement. The logistics sector is rated by most market experts as the best performing submarket in terms of rents, just ahead of the office sector. The retail sector is under significant duress with respect to rent levels. There are very few sales occurring, even among prime assets, as the few active buyers are seeking opportunistic yields and most owners are choosing not to transact at these prices unless forced to do so. 

Outlook

We expect general market conditions to eventually improve in late 2010 due to lower interest rates and a general improvement in lending conditions. Investor activity until then will be limited.  

Financial Statements

Copies of the interim statement will be available on the company's website: www.equestbalkan.com and by writing to Equest Balkan Properties c/o IOMA, IOMA House, Hope Street, Douglas, Isle of Man IM1 1AP. 

Equest Property Management Limited

18 September 2009

Independent review report to Equest Balkan Properties PLC 

Introduction 

We have been engaged by the Company to review the set of financial statements in the half-yearly financial report for the six months ended 30 June 2009 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated cash flow statement, and notes 1 to 6. We have read the other information contained in the half yearly financial report which comprises only the Chairman's statement and the Investment Manager's Update, and considered whether it contains any apparent misstatements or material inconsistencies with the information in the financial statements. 

This report is made solely to the Company in accordance with guidance contained in ISRE (UK and Ireland) 2410, 'Review of Interim Financial Information performed by the Independent Auditor of the Entity'. Our review work has been undertaken so that we might state to the Company those matters we are required to state to them in a review 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, for our review work, for this report, or for the conclusion we have formed. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The AIM rules of the London Stock Exchange require that the accounting policies and presentation applied to the financial information in the half-yearly financial report are consistent with those which will be adopted in the annual accounts having regard to the accounting standards applicable for such accounts. 

As disclosed in Note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The financial information in the half-yearly financial report has been prepared in accordance with the basis of preparation in Note 2. 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the financial information in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the financial information in the half-yearly financial report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with the basis of accounting described in Note 2. 

Emphasis of matter 

In forming our review opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosures made in the Chairman's statement, and referred to in note 2 to the financial statements, concerning the Group's ability to continue as a going concern. 

As explained in note 2 and the Chairman's statement, the Group continues to execute an asset disposal programme, expected sales proceeds from which, along with other measures including the drawdown of committed loan facilities, are considered by the Board to be sufficient to support the Group's ability to continue as a going concern for the foreseeable future. These conditions, along with other matters explained in note 2, represent a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern.  The financial statements do not include the adjustments that would result if the Company was unable to continue as a going concern.

Grant Thornton

Auditor

Douglas, Isle of Man 

18 September 2009

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

  CONSOLIDATED STATEMENT OF FINANCIAL POSITION

NOTES TO THE FINANCIAL STATEMENTS

1. General information

Equest Balkan Properties plc ('the Parent') was incorporated and registered in the Isle of Man under the Isle of Man Companies Acts 1931 to 2004 on 4 November 2005 as a public company with registered number 114723C. 

2. Basis of preparation and accounting policies

The unaudited interim financial statements for the six months ended 30 June 2009 have been prepared on a basis consistent with accounting policies set out in the Equest Balkan Properties plc audited annual report and accounts for the year ended 31 December 2008, which were prepared in accordance with IFRS as adopted by the European Union.

Accounting policies

The same accounting policies, presentation and methods of computation are followed in these financial statements as applied in the Group's latest annual audited financial statements, except for the following Standards and Interpretations which have been adopted by the Group in the current financial year. These standards and interpretations did not have significant impact on the Group's results or financial position.

• IAS 1 (Amendment) - Presentation of Financial Statements: A revised Presentation; 

• IAS 23 (Amendment) - Borrowing costs; 

• IFRS 2 (Amendment) - Vesting conditions and cancellations; 

• Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations arising on Liquidation; 

• IFRIC 16 - Hedges of a net investment in a foreign operation; 

• IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (amended).

The following standards and interpretations, issued by the IASB or IFRIC, have not been adopted by the Group as these are not effective for the year 2009. The Group is currently assessing the impact these standards and interpretations will have on the presentation of its results in future periods: 

• IFRS 3 (Revised) - Business combinations;

• IAS 27 Consolidated and Separate Financial Statements (amended).

Going concern    

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and for a period of at least 12 months from the date of signing of these interim financial statements. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements for the six months ended 30 June 2009. The Group's ability to continue as going concern is further discussed in the Chairman's statement.

3. Loss/ earnings per share

Basic loss per share is calculated by dividing the net loss attributed to the ordinary shareholders of the Parent by the weighted average number of ordinary shares during the period. 

The Parent has no dilutive potential ordinary shares; the diluted loss per share is the same as the basic loss per share. 

4. Net asset value per share

The net asset value per share is calculated by dividing the net assets attributable to the ordinary shareholders of the Parent by the number of ordinary shares outstanding at 30 June 2009. 

5. Property assets

Fair values of the Group's property assets are determined by the Directors. At 30 June 2009 Directors' valuations were based on their best estimate of market value.  At 30 June 2008 and 31 December 2008 Directors' valuations were based on valuations prepared for each individual property asset by independent professionally qualified valuers CB Richard Ellis. 

The carrying value and fair value of the Group's property assets by classification in the balance sheet are summarised as follows:

Property assets held by subsidiaries

Property assets held by associates

At 30 June 2009 the Group holds three investments that are accounted for as associates: Glorient, Archway and Forum Serdika.  The investment in Archway was provided against in full.  The Group's share of net assets of Glorient and Forum Serdika at 30 June 2009 is Euro 31,356,000 which represents 40% of Glorient and 80% of Forum Serdika at that date.  Forum Serdika is recognised as an associate because the Group has no control over this company.

At 30 June 2008 and at 31 December 2008 the Group held two investments that are accounted for as associates: Glorient and Archway. The Group's share of net assets in Glorient and Archway at 30 June 2008 was Euro 36,990,000 which represented 40% of Glorient and 50% of Archway at that date.  The Group's share of net assets in these two associates at 31 December 2008 was Euro 32,884,000 which represented 40% of Glorient and 50% of Archway at that date.  

6. Other administrative costs 

The other administrative costs incurred by the parent and intermediate holding companies are as follows:

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