Equity Two : Annual Report 2021-2022

E Q U I T Y

TWO

EQUITY TWO PLC | ANNUAL REPORT 2021/22

A CARSON CUMBERBATCH COMPANY

Contents

Chairman's Statement	1
Management Discussion and Analysis	3
Risk Management	5
Annual Report of the Board of Directors
on the affairs	of the Company	9
Profiles of the	Directors	19
Related Party Transactions
Review Committee Report	20
Audit Committee Report	21
Financial Calendar	23
Independent Auditor's Report	24
Statement of Profit or Loss and Other
Comprehensive Income	26
Statement of Financial Position	27
Statement of Changes in Equity	28
Statement of Cash Flows	29
Notes to the Financial Statements	30
Five Year Summary	57
Statement of Value Added	58
Information to Shareholders and Investors	59
Notes		61
Notice of Meeting	62
Form of Proxy	63

This report can be accessed online at

http://www.carsoncumberbatch.com

Chairman's Statement

Dear Shareholder

On behalf of the Board, it is with great pleasure that I welcome you to the 32nd Annual General Meeting of the Company. Herewith I present to you the Annual Report and Audited Financial Statements for the financial year ended 31st March 2022.

Over the past three years and counting, Sri Lanka faced rather unfortunate circumstance of having to navigate through extremely rough waters, with new challenges being presented in quick succession, prior to even the dust completely settling on the previous one. The 2018 political turmoil was followed by the unfortunate Easter Sunday terrorist attacks of 2019. As we were just beginning to gain our balance back as a country, the pandemic came into being, with hitherto unprecedented socioeconomic effects and challenges to life as we know it. Now, as we slowly recover from the pandemic and its aftermath, we are faced with the gravest economic crisis the country has experienced post-independence.

I believe it is high time that Sri Lanka brings about a complete overhaul of policy reforms across the board, regardless of political affiliations. The immediate requirement would be a well thought- out fiscal policy as a spring-board to get us out of the present economic trough, while minimising the burden on the poor.

This needs to be followed by developing national policies with long-term visions designed to leave a better country for the generations to come. Most importantly, this should be done in all-party cohesion so that even if shifts in the power base occur, the policies will remain unchanged.

To this end, the government services require a complete revamp reflecting economic sense. A healthy balance must be struck between earning and non-earning infrastructure spending, along with solid revenue plans to convert them into profit centres. Subsidising for political gains needs to be avoided at all levels. Socially marginalised communities should be looked after via well thought-out and executed programmes. It is high time that Sri Lanka looks for new avenues to bring in value additions for our raw exports whilst venturing into out-of-the-ordinary modes to derive foreign earnings to the country. This will necessitate to have the required skillset in the country and the laws and regulations framework to back it up. Ease of doing business, political stability, and policy consistency needs to be drastically improved to even consider attracting impactful FDIs. Such

forward planning will spur the business environment, enable expansions, curtail unemployment and boost per capita income.

However, it can be said without a doubt that we all must prepare for the tough times ahead. In today's adverse economic backdrop of steep Rupee depreciation, abrupt inflation, high interest rates, and scarcity of essential goods for day-to-day living, businesses too undoubtedly feel the pressure of costs creep-up and eroding margins, which naturally redirect short-term strategies towards rethinking and repositioning the status quo or even lean towards activating a survival plan.

These macro-pressures have created a brand-new set of challenges for your Company as well in terms of cost escalation of repairs and maintenance, increasing asset replacement costs, and operational costs along with high double-digit inflation. Further, the restrictive corporate discretionary spending power on tenancy rentals limits our approachable market in terms of attracting prospective tenants to fill vacancies in a timely manner. On a secondary level, prevailing fuel shortages, increasing of transport costs, and various other difficulties will extend the work-from-home trend beyond what COVID would have typically necessitated, thereby reducing the immediate market need for office premises.

Global supply chain disruptions due to COVID are yet to reach normalcy. To add to this misery, such disruptions are further aggravated by nations at war. In this context, our business too will face many challenges, including construction-related raw material scarcity, unprecedented levels of construction costs, and other operational cost increases, which will in turn impact our bottom line. Any new entrants who were planning to venture into the market, including those mid-way through constructions will find it difficult to justify increasing budgets in the immediate future and also will have to battle-out delays due to the aforementioned supply disruptions.

However, in the lead-up to the present high interest environment, the local real estate market performed well, with both commercial and residential properties gaining in value. Further, condominium and housing markets continued to show traction as investors and homeowners used them as safe asset classes and to hedge against possible increases in construction costs respectively. However, in the present high interest environment, the values built up thus far will possibly be put to test.

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Chairman's Statement

In contrast, the story played a little differently for the Colombo commercial spaces' leasing market. With the entirety of the past two years clouded with varying intensities of COVID, companies adopted a work-from-home culture wherever possible, resulting in the leasing market undergoing a period of hibernation. Towards the end of the financial year, corporates began to gradually return to normalcy, with the slowdown of the virus's spread, primarily due to the successful vaccination drive. However, the ongoing macro-economic pressures, particularly the high interest rates, will force many corporates to delay,

or in some cases, even withdraw their premises' expansion or upgrading plans. The upcoming significant pipeline of commercial stock in and around the Central Business District will exert further pressure on the segment's ability to push for sustainable absorption levels.

However, as mentioned previously, the premiumisation of Colombo properties continues to bear fruit, evidenced by the gain in fair valuation of our investment properties of Rs. 46.9 Mn during the year further to the Rs. 1.6 Mn recorded in the preceding year.

With respect to the operational front, the Company achieved a revenue of Rs. 133.6 Mn, which is a growth of 7% over last year attributable to year-on-year upward rental revisions and the low base of comparable revenue due to the concessions offered to tenants in light of COVID during last year. Accompanied by the aforementioned fair valuation gain, the profit before tax of the Company increased by 51% to reach Rs. 138.1 Mn. An interim dividend of Rs. 0.65 per share was declared and paid for in the financial year ended 31st March 2022, translating into a payout of 28% on the operational net profit of the Company, excluding fair value gain on investment properties and related deferred taxation.

Considering the prevailing economic conditions, we can anticipate the real estate market to go through a period of turbulence going forward, as many ambiguities lead towards misalignments of thoughts. Disposal decisions could be due to a number of reasons including mortgage-pushed sales, need for liquidity, or invest at high market rates, etc. However, some localised buyers will view real estate as a safer asset class over financial instruments, while the continuing Rupee depreciation against the greenback invites foreign investors to invest in local real estate stock as bargain hunting. The shift of equilibrium these factors bring into the market will determine its course over the medium-term.

As my parting sentiments, I would like to offer my gratitude to the shareholders, valued tenants, regulatory authorities and other stakeholders for their enduring support to the Company. I would also like to thank the members of the Audit Committee, Nomination Committee, Remuneration Committee, and

the Related Party Transactions Review Committee for their commitment and contribution. Further, I extend my sincere thanks and best wishes to all our valued staff members for their invaluable contributions throughout the year.

Let's all do our part for a better tomorrow!

(Sgd.)

D.C.R. Gunawardena

Chairman

Colombo

3rd June 2022

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Management Discussion and Analysis

MACRO OVERVIEW

Following the 3.6% contraction experienced by the Sri Lankan economy in 2020 due to adversities brought around by COVID, the country recorded a rebound of 3.7% in 2021, as we drew closer towards putting the pandemic behind us. With the gradual easing of pandemic-related disturbances, and the push from pent-up demand, the industrial sector too contributed towards this recovery with a growth of 5.3%. The construction industry maintained its share of GDP at 6.1%, while recommencing growth at a slow rate of 1.9%, compared to the -13.2% constriction witnessed in the previous year.

The accommodative monetary policy stance practiced throughout 2020 in favour of reviving downed business sentiment at the onset of the pandemic continued until August of 2021, at which point CBSL commenced its monetary tightening stance on the idea of arresting inflationary pressures. Despite the total increase in policy interest rates being merely 50bps during 2021, following the economic pressures of early-2022, we have seen the CBSL taking corrective actions to increase policy rates by a further 850bps during the first four months of the year.

CBSL's tightening monetary policy stance in 2021/22

(%)

15

13

11

9

7

5

3

1

Jan-21

Feb-21

Mar-21

Apr-21May-21

Jun-21

Jul-21

Aug-21Sep-21

Oct-21

Nov-21Dec-21

Jan-22

Feb-22

Mar-22

Apr-21

SRR

SLFR

SDFR

Source: Central Bank of Sri Lanka ("CBSL") Annual Report - 2021

In an environment of subdued foreign exchange inflows, with sizeable external debt service commitments, and the Central Bank's intervention in the foreign exchange market led

the country's gross officials reserves to further decline from USD 5.7 Mn to USD 3.1 Mn by the end of 2021. In spite of this effort, the Rupee depreciated against the US Dollar by 7% during 2021 to reach LKR 200.43 by the end of the year. However, our currency depreciated further by an alarming 70% during the period from January to April of 2022. With COVID taking its toll on international tourism, the USD 4 Bn industry was only able to bring in merely USD 0.5 Bn in 2021. Further, worker remittances too fell to USD 5.5 Bn in 2021 compared to the per-year average of USD 7 Bn it produced during the period from 2014 - 2019.

INDUSTRY SNAPSHOT

On the commercial properties front, the drop witnessed in "Grade A" market absorption rates following the outbreak of COVID due to businesses downgrading and/or adopting remote working began experiencing recovery towards the end of the year. However, the recent influx of major office spaces to the market and the upcoming long-term commercial pipeline including Port City could weigh in on overall market vacancy rates and rental yields. Therefore, if we are to make Port City a success story and cascade its benefits towards the local economy with respect

to real estate, retail, tourism, healthcare, education, and most importantly, knowledge and technical know-how transfers, we still have a considerable way to go in order to rebuild investor confidence and attract much sought after FDIs.

When considering urban land values, the slowdown witnessed in Colombo land price growth in 2020 has bounced back strongly in the first half of 2021 with a 6.8% gain over the six months backed by the 6.1% growth in commercial land values according to the CBSL's Land Value Index. Following the low interest rate environment that prevailed during the year and inflationary pressures, investors favoured real estate investment avenues while house hunters were in a position to borrow at affordable rates to invest in real estate. This is evident in the 49% uptick witnessed in condominium property volumes by the final quarter of 2021 compared to a year ago, particularly seen in the growth of mid-to-luxury properties. However, in the low interest environment that prevailed during 2021, banking industry loans and advances to the Construction industry grew at 8.5% to reach LKR 1,608 Bn by the end of the year.

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