Investments in unconsolidated companies

Investments in unconsolidated companies represent equity interests of 50% or less and in which Belmond exerts significant influence, but does not have effective control of these unconsolidated companies and, therefore, accounts for these investments using the equity method. As at December 31, 2017, these investments include the 50% ownership in rail and hotel joint venture operations in Peru, the 25% ownership in Eastern and Oriental Express Ltd, and the Buzios land joint venture which is 50% owned and further described below.

In June 2007, a joint venture in which Belmond holds a 50% equity interest acquired real estate in Buzios, a beach resort area in Brazil, for a cash consideration of $5,000,000. Belmond planned to build a hotel and villas on the acquired land and to purchase the remaining share of the joint venture company when the building permits were obtained from the local authorities. In February 2009, the Municipality of Buzios commenced a process for the expropriation of the land in exchange for a payment of fair compensation to the joint venture. In April 2011, the State of Rio de Janeiro took over the expropriation process as part of a broader State plan to develop a coastal environmental park. Under applicable law, the State had five years to carry out the expropriation in exchange for fair value, which it has failed to do by the April 18, 2016 deadline. As a result, the land returned unencumbered to the joint venture, although it can be subject to expropriation again. The Company and its joint venture partner are assessing their options, including negotiation with or litigation against the State to seek a permanent resolution of the status of the land, but in any case, the Company expects to recover its investment in the project.

On May 21, 2015, Belmond sold its 50% ownership in Hotel Ritz by Belmond, Madrid, Spain. Belmond and its joint venture partner sold the shares in the entity that owns the hotel for gross proceeds of €130,000,000 ($144,529,000 at date of sale). As a condition of the sale, Belmond’s management contract with Hotel Ritz by Belmond was terminated, resulting in the receipt of a termination fee of $2,292,000.

The following table shows the net proceeds to Belmond and a summary of net assets sold, resulting in a gain of $19,676,000 that is reported within gain on disposal of property, plant and equipment and equity method investments in the statements of consolidated operations:



	Hotel Ritz by Belmond
	May 21, 2015
	$'000

Receivables due from unconsolidated companies	29,679
Investments in unconsolidated companies	—
Net assets sold	29,679
Transfer of foreign currency translation gain	(5,613	)
	24,066

Consideration:
Cash	42,197
Less: Costs to sell	(747	)
Plus: Management contract termination fee	2,292
	43,742

Gain on sale	19,676

Summarized financial data for Belmond’s unconsolidated companies are as follows:



	2017	2016
December 31,	$’000	$’000

Current assets	88,119	96,247

Property, plant and equipment, net of accumulated depreciation	228,970	213,958
Other non-current assets	55,605	111,146
Non-current assets	284,575	325,104

Total assets	372,694	421,351

Current liabilities, including $24,793 and $21,021 current portion of third-party debt	101,668	89,785

Long-term debt	143,187	153,876
Other non-current liabilities	7,892	27,545
Non-current liabilities	151,079	181,421

Total shareholders’ equity	119,947	150,145

Total liabilities and shareholders’ equity	372,694	421,351

One of Belmond's unconsolidated companies reclassified a balance between property, plant and equipment and other non-current assets, following the adoption of ASC 853, Service Concession Arrangements in 2015. As a result, as at December 31, 2016, the property, plant and equipment balance decreased by $81,704,000 and other non-current assets increased by $81,704,000, with no net change to total assets, which is reflected in the table above. There is no impact on net earnings, EPS or cash flows in any period presented in Belmond's consolidated financial statements.



	2017		2016	2015
Year ended December 31,	$’000		$’000	$’000

Revenue	207,659		191,551	160,614

Gross profit ⁽¹⁾	141,708		135,000	104,708

Net earnings ⁽²⁾	(20,778	)	21,720	17,723

⁽¹⁾ Gross profit is defined as revenues less cost of services of the unconsolidated companies.

⁽²⁾ There were no discontinued operations, extraordinary items or cumulative effects of a change in an accounting principle in the unconsolidated companies.

Included in unconsolidated companies are Belmond’s hotel and rail joint ventures in Peru, under which Belmond and the other 50% participant must contribute equally additional equity needed for the businesses. If the other participant does not meet this obligation, Belmond has the right to dilute the other participant and obtain a majority equity interest in the affected joint venture company. Belmond also has rights to purchase the other participant’s interests, which rights are exercisable in limited circumstances such as the other participant’s bankruptcy.

An impairment charge of $58,531,000 was recorded in FTSA, the joint venture in which the Company has a 50% interest and that has a concession from the Government of Peru to operate the track network in southern and southeastern Peru. Belmond's equity share of this impairment is $29,266,000 which is recorded in share of earnings from unconsolidated companies. The concession had an initial term of 30 years from 1999 with the option to apply for six 5-year extensions. In December 2017 the joint venture received a denial of its third extension request. As a result, the joint venture can no longer conclude that the remaining three extensions are probable and has therefore reduced its expectation of the total expected life of the concession to the contracted term of 35 years of which 17 years are remaining as of December 31, 2017. This triggered an impairment test of the assets within the joint venture and the shorter time period over which to recover the carrying value of the assets has led to an impairment charge being recorded in the year ended December 31, 2017. The life of the concession is now expected to expire in 2034. The Company is also a 50% owner of the PeruRail joint venture, which operates and manages rolling stock, including the Belmond Andean Explorer and Belmond Hiram Bingham, and is not anticipated to be impacted by the shortening of the expected FTSA concession life as it can continue to run trains on the track after the conclusion of FTSA's concession.

There are contingent guarantees to unconsolidated companies which are not recognized in the consolidated financial statements. The contingent guarantees for each Peruvian joint venture may only be enforced in the event there is a change in control of the relevant joint venture, which would occur only if Belmond’s ownership of the economic and voting interests in the joint venture falls below 50%, an event which has not occurred and is not expected to occur. As at December 31, 2017, Belmond does not expect that it will be required to fund these guarantees relating to these joint venture companies.

Belmond has contingently guaranteed, through 2021, $15,868,000 of debt obligations of the joint venture in Peru that operates five hotels and has contingently guaranteed the Peru rail joint venture’s obligations relating to the performance of its governmental rail concessions, currently in the amount of $9,899,000, through May 2018.

At December 31, 2014, Belmond guaranteed $4,124,000 of the debt obligations of the rail joint venture in Peru. The guaranteed debt was repaid by the joint venture in the year ended December 31, 2015. See Note 6.