Letter to shareholders – Communication

Dear Shareholder,

Hereby we want to take the opportunity to clear the situation in the light of recent developments that have affected the Brickstone Real Estate Fund SICAV plc.

It is evident to everyone that the situation that has arisen, between Russia on one hand and Ukraine on the other hand, caused heavy impact on the Brickstone Fund.

We would like to point out that during 2015 the works on Novosibirsk’s project (Russia) continued, and the 4 stars hotel was opened in February 2016.

After the decision to return of the determination of 31 December 2015 NAV we faced a massive impact on it which has been heavily affected due to above mentioned international crisis.

We remind that the decision to return to the NAV determination was dictated by the need to raise the money necessary for the ordinary management of the Fund, which obviously needs to pays structures as Auditors, rather than those who play the role of Service Providers or to pay the fees of the Malta Financial Service Authority, just to make some examples.

Knowing that the NAV would have been particularly low, and not identifying in recent months important new partners willing to participate in the initiatives of the Fund, in particular the project of Novosibirsk, we decided to collect only the minimum necessary amount of money to meet the current expenditure for he next following months.

The NAV, which is going to be published as soon as the auditors will have finalized their job (due to the peculiar general situation the Service Provider wants to get the support of the Auditors, PWC, before issuing the NAV), and should be into the range 25-30 €/share would make it possible, to potential major investors, to enter on favorable terms: by the way we reiterate that none expressed interest for important investment.

But if on the one hand, the initiative to determine the NAV has allowed some breathing space in the medium term, on the other hand the old problems persist related to international Ukraine crisis and sanctions against Russia, to which are added new concerns related to Russian rapport with the bank that provided the mortgage loan for the Novosibirsk hotel.

We will now analyze the complex situation under different point of view:

International Ukraine crisis and Russia sanctions

We know very well that the European Union is focusing on de-escalating the crisis in Ukraine and on assisting Ukraine. The EU has been unwavering in its support for the country’s territorial integrity and sovereignty.

We remember that in March 2014, the European Council agreed the first diplomatic measures in response to Russian actions in Ukraine. EU leaders also set out a second stage of further measures in the absence of de-escalatory steps and additional far-reaching consequences for EU-Russia relations in case of further destabilisation of the situation in Ukraine.

In view of Russia’s actions destabilising the situation in eastern Ukraine, the EU imposed economic sanctions in July 2014 and reinforced them in September 2014. In March 2015, the European Council linked the duration of those economic restrictions to the complete implementation of the Minsk agreements.

On 21 December 2015, the Council prolonged EU economic sanctions against Russia until 31 July 2016 because the EU leaders linked the duration of the sanctions to the complete implementation of the Minsk agreements, which was foreseen to take place by 31 December 2015.

However, since the Minsk agreements was not implemented by 31 December 2015, the duration of the sanctions has been prolonged whilst the Council continues its assessment of progress in implementation.

We remind the measures target certain exchanges with Russia in the financial, energy and defence sectors and in the area of dual-use goods.

Finally we shouldn’t forget that recently the voters in the Netherlands have rejected in a referendum an EU partnership deal to remove trade barriers with Ukraine, which is exactly the opposite of what EU and USA tried to do.

Generally speaking the Ukraine crisis has put an end to 25 years of U.S.-Russia relations. It seems that there is an absence of any influential forces in either country actively working for their repair; this is evidence of how much pretension and frustration had infused relations in recent years. It also suggests a deep-seated anti-American bias in the Russian elite, mirroring a Russophobia of comparable depth on the American side.

During these almost 2 years there are no circumstances that move to a reset in relations. Seeking to repair them by returning to an earlier set of assumptions about them seems a dead end.  But relations need to be rethought in light of the realities in both countries, including the huge divide in worldviews

But the appropriate response is not to return to the Cold War and neither it is to speak of a return to cooperation if Russia realizes the errors of its ways and begins to conduct itself in a way the West finds more compatible.

Rather, politicians need to abandon hopes of transforming Russia like a West country and acknowledge that it is one of many major powers in the world today. In dealing with Russia, they need to think in terms of competition and accommodation, that is, of great power diplomacy, refashioned to take account of the differences between today’s world and the last period of great power diplomacy in the nineteenth century. They might also remind themselves, that period was one of relative peace and security, of prosperity and progress.

Of course this situation afflicts a lot the Brickstone Fund, and for those of us with longstanding interest in Russia relations, the current state of affairs is as distressing as it is alarming.

Update on the projects current situation

Looking at the three different projects the Investment Committee commented:

Ukraine Plot As for the Ukraine plot of land, we confirm that there are no intentions to start with the develop of the project, since the situation into the country is still not clear and there are no investors willing to invest.

Hotels in Russia

St Petersburg –  The hotel continues in its operations and business appears to be constant with major bookings coming directly via Trip Advisor and Booking.com and the reputation as top 5 star hotel is getting stronger.

The hotel in Novosibirsk was opened in February 2016 and despite the law season the first clients were impressed about the structure.

Financial Situation

Talking about the Financial situation, if only we the NAV we were able to solve the financial problems of the SICAV, on the other hand it looks like we are again in a tough situation with Sberbank, the bank which give us the mortgage agreement in Novosibirsk.

As you probably remember due to the fall of the Ruble the value of Novosibirsk hotel has decreased considerably (the Independent Evaluators made a market value Based on the Income approach of 19.600.000 euro) and the building, as for the Bank evaluation, can not be any more a sufficient guarantee of the loan.

We are conducting several talks with the bank, proposing an hypothesis of repaying back part of the loan, but to achieve the Bank request we should collect 7 million € in order to cover the gap with their request.

The bank is very straight this time. They threatened us saying that in case of default of the talks they will ask us to payback all the loan and if we don’t do that they will start to take the building.

The situation is very tough and soon in these days there will be new meetings with the bank in order to deal with this matter.

In the above table there is the currency situation which improved a bit during the last period. We remind the mortgage was opened in USD so we at least hope the bank will keep in mind this improvement.

Final consideration

On Tuesday April 13th, 2016 we had a meeting with the Malta Financial Service Authority which is seriously concerned about the whole situation of the Brickstone Fund.

At the meeting all the topics we have exposed in this letter were touched, and emphasis was placed on two of them: a) the need to fully inform the shareholders, b) the liquidity situation.

If with the foregoing in this long letter we believe we have sufficiently fulfilled what we had to to the shareholders as well as to the requests made by the MFSA, in the next steps of this letter we consider it necessary to explain the possible future scenarios.

  1. Dealing with the bank, the most urgent an tough problem at the time being, can lead to the result of finding an agreement that allows us to gain time, emphasizing the low value attributed to the hotel from the evaluators, as well as the positive performance of oil – ruble indicators, which are also able to improve the overall picture of the hotel, how is it that is not reached this result;
  2. If only we had not been able to achieve the goal of a peaceful solution with the bank, we should run:
    • Either ask for an immediate liquidity injection from the shareholders, since there are no other realistic options to get loans from other institutions;
    • Or we could try to find as soon as possible a buyer, who will get a wonderful present since we should the only one in a hurry  (by the way either the point a) and b) are hypothesis we consider despite the relation with the bank but we haven’t got any result till now);
  3. Despite the above mentioned points, we are olso evaluating the chance to close the Brickstone Fund, assigning the assets to a newco to be established either in Malta or in another country, in order to dissolve the ties with the supervisory authorities who regret the current situation (even if it is aware it dosen’t depends on the management but must be attribuited to a force majour) and perhaps also we could save on operating costs, allocating shares of the new company to the shareholders of the Fund Brickstone according to their current shares.

Likely the examination of possible scenarios is not exhaustive but we believe it is enough to understand on the one hand the seriousness of the situation, and on the other hand the fact that at the time being all options are considered.

Obviously, it is our will to do our best to save the projects that has seen us struggle against everything and everyone, at a particularly difficult moment in history, keeping you informed about the future developments.

Yours Sincerely,

Luigi Pesce