Founders Dvir Cohen Hoshen and David Flusberg
Founders Dvir Cohen Hoshen and David Flusberg.
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The financial statement that Adama Holding published for the second quarter shows the challenging reality faced by the company. It had thought to conquer the real estate markets of eastern Europe, but stumbled as crisis shook the world.

Adama is controlled by a number of international investment funds, including Tiger Global, Immosat and Morgan Stanley.

Among other things, its report revealed that the Turkish tax authorities are demanding 27 million euros from its Turkish affiliate, Gaia Real Estate Holdings, in which Adama owns a 33% interest. The tax is owed on various transactions in which Gaia sold companies in Turkey, mainly last year, according to the Turkish authorities.

The taxman is also demanding that Gaia provide 36 million euros worth of collateral to assure payment of the tax, and has already placed liens on 11.3 million euros worth of Gaia's assets, as well as on one of its bank accounts, which holds 186,000 euros in cash.

Gaia's total assets were worth only 16.5 million euros at the end of June, according to Adama's second-quarter statement.

Adama, after consulting its legal and tax consultants, insists that the Turkish tax authority's figures are overblown. Its position is that it complied with the law throughout and made all the payments due on the transactions. Therefore, it has not made a provision for tax following the bill from the Turkish tax authority.

But the developments in Turkey could affect its plans to sell assets, which could in turn have a negative effect on its future cash flow, Adama acknowledged.

As of the end of June 2010, Adama had 22.7 million euros in cash and cash equivalents (worth about NIS 110 million ) at the consolidated level. Its biggest challenge will come in November, when it has to repay NIS 70 million in principal and interest to Series B1 bondholders, out of NIS 290 million owed altogether. Its bonds are trading at a yield of 22%, in part because of their low liquidity.

Despite the travails in Turkey, Adama officials believe ways can be found to pay the debts, and that 14.4 million euros for the Filan construction project in Romania can be refinanced by October. The company, managed by Dvir Cohen Hoshen and David Flusberg, is also confident that refinancing can be obtained for an 8-million-euro loan a subsidiary took to buy land for a high-rise project in Bucharest called Anador. That loan is due in November 2011.

Assuming Adama does obtain refinancing for these loans and finds solutions for the Turkish tax problem, it expects to have 10 million euros in cash in June 2011, thanks to income from selling homes, commercial areas and other real estate.

But because of the global economic crisis, which has led to difficulties in obtaining refinancing and made it harder for its clients to borrow, it cannot promise that these assumptions will materialize, the company warned in the executive summary in its second-quarter report. "Substantial fluctuations in the markets could substantially affect actual cash flow," the board of directors said.

No relief from Romania

Adama builds residential and commercial properties in Ukraine, Turkey, Romania, Croatia and Moldava. And Romania has been a troublesome venue as well.

The company said that though the Romanian government's Prima Casa plan guarantees mortgages for housing, which allows homebuyers to obtain lower interest rates, and has lowered VAT on first homes up to a certain price, this hasn't helped the housing market much. Buying a home remains snarled in red tape, and the fact is that housing sales are sharply down, Adama said.

Demonstrating how tough the Romanian housing market is, at the end of July Adama agreed to amend the terms of an agreement under which it sold 100 apartments, parking places and storage in the Evocasa Armonia project, as well as 38 apartments in another project, Optima.

At least in Moldava and Ukraine, its business environment did not change in the second quarter of 2010, Adama said. But the economic situation in both is dire, and the level of liquidity is low. Therefore, it does not mean to pursue major projects in either venue for the time being.

The economic situation in Turkey, in contrast, has improved, it observed.

Adama has not issued shares on the Tel Aviv Stock Exchange, but it has to publish financial statements because its bonds are listed for trading.

For the first half of 2010, the company reported that revenues fell 20.6% against the same period of the year before, to 7.9 million euros. It ended the first half of 2010 with a net loss of 12 million euros, compared with a net loss of 14 million euros in the same period of the year before.

From the start of 2009, it has accrued a loss of 60 million euros. Cash flow in the first half of 2010 was a negative 16.1 million euros, adding to cash burn of 34.6 million in 2009.