Mr. Harris Kupperman
MONGOLIA GROWTH GROUP LTD. PUBLISHES MAY 2013 MONTHLY LETTER TO SHAREHOLDERS
Mongolia Growth Group Ltd. has released its May, 2013, letter to shareholders.
May, 2013, shareholder letter
To the shareholders of Mongolia Growth Group Ltd.,
During May of 2013, MGG purchased one retail asset and did not sell any property assets. We are still actively involved in researching a number of sizable property assets that we are looking to purchase, but there can be no certainty that we will be able to agree on acceptable terms for a transaction.
During the month of May, management undertook a thorough review of all of our assets with the view of reducing our costs and eliminating certain assets that are either too small, outside of our core competencies in downtown Ulan Bator commercial property or too difficult to manage. In total, we have selected 23 property assets comprising approximately 27 per cent of our total assets by number, 16 per cent of our portfolio at cost and contributing 13 per cent of our monthly rental revenue to dispose of. Despite producing a moderate portion of our total revenue, the expenses involved in managing these assets means that the actual net operating income produced by them is quite negligible as a percentage of our total property net operating income. We anticipate redeploying this capital into one or two larger assets in the future that will have much more attractive return characteristics. In particular, disposing of these assets will almost entirely remove us from the ownership of residential properties, with the exception of those assets that are owned for employee housing. It is expected that the majority of these sales will be completed by year-end and that the company will show a gain on sale for the majority of the assets.
In addition, as a consequence of this review, MGG is assessing the amount of management time and cost required to administer Mandal, our insurance subsidiary, together with the likelihood of profitability from Mandal, in the near term, given the substantial costs of it being part of a public company with public company reporting obligations. Thus far, all indications are that MGG would substantially reduce recurring expenses and free up considerable senior management time if Mandal is separated from MGG. To date, our findings are preliminary and nothing definitive has been determined in regard to disposing of Mandal. We are exploring various different avenues to best maximize shareholder value.
As our company has matured and become more experienced in the Ulan Bator property market, we have realized that we want to focus on larger income-producing assets that are easier to manage. Outside of these, we are still focused on acquiring high-street retail properties and redevelopment sites that we can build international-quality buildings on. In the end, we want to grow into a company that owns institutional quality assets in Ulan Bator. The assets that we are disposing of do not make this cut.
On May 29, 2013, we filed our first quarter 2013 unaudited financial results. Our company reported a net loss for the period of $64,334. I should note that this loss included a $1,136,125 unrealized gain on fair-value adjustment on investment properties. I would like to note that this gain is a non-cash accounting entry. These losses were the result of lower revenues caused by the depreciation of the Mongolian tugrik/Canadian dollar exchange rate (leading to lower revenues), the final instalment of our TSX Venture Exchange listing expenses and very sizable one-time expenses related to a proposed acquisition that was not consummated. Excluding these two one-time expense items, we came very close to showing a break-even EBITDA (earnings before interest, taxes, depreciation and amortization) result after excluding share-based payments and the unrealized gain on fair-value adjustment on investment properties. We anticipate that our current small recurring losses will become moderate profits upon the conclusion of many of the non-recurring expenses and higher expected rents as recently remodelled properties are leased out. To that end, in early June, we leased out an additional 203 combined metres in Denver Center and Anand, which leaves us with only 309 remaining metres to lease out in these two buildings.
In the attached chart, you can see the key segments and how they performed during the first quarter. For the sake of clarity, investment income relates to interest earned by the various divisions.
Property Insurance Corporate Total
EBITDA ($8,820) ($334,705) ($912,336) ($1,255,861)
Share-based payments ($136,832) ($174,547) ($315,495) ($626,874)
Investment income $97,797 $155,195 $155 $253,147
EBITDA excluding $225,809 $(4,963) ($596,686) ($375,840)
share-based payments and
adding investment income
Gain on sale of properties
included in EBITDA $2,515
Certain highlights from the quarter include:
- Property results:
- Rental revenues were $414,385 (excluding intercompany revenues of $24,333 from Mandal);
- Quarter-end vacancies increased moderately to 6.3 per cent versus 3.3 per cent of rentable properties in the previous quarter; this is the result of shifting two office properties from the renovation category to rentable properties category following the completion of renovations;
- Completed a sizable renovations program on three office buildings; when fully leased, these assets are expected to substantially increase rental revenues with minimal additional expected costs;
- Disposed of an investment property for proceeds of $40,443 with a $37,928 fair value for a $2,515 gain on disposal;
- Insurance results:
- Net premiums earned of $342,117;
- Net claims incurred of $223,490;
- Corporate information:
- Has grown to 102 total employees (93 Mongolian and nine foreign).
For more information on our first quarter results, please see our condensed interim consolidated financial statements, and management discussion and analysis as filed on SEDAR.
In summary, we remain happy with the progress that our company continues to make. If not for the very sizable costs incurred for an acquisition that was not consummated and the TSX-V listing expense recognized in the period, we would have reported a loss of around $225,000, if you exclude share-based payment expenses and the unrealized gain on fair-value adjustment on investment properties. While it is somewhat disappointing that we remain slightly short of profitability, these results are in line with our expectations as we continue to spend on longer-term growth initiatives at the expense of short-term economic gains.
Chairman and chief executive officer
Mongolia Growth Group Ltd.
We seek Safe Harbor.
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