2019 financial year with very good results

Operating income

1259

million CHF operating income
+3.7% year-on-year

EBIT

628

million CHF operating result
+31.3% year-on-year

Profit

609

million CHF profit
+95.7% year-on-year

Investment Properties

11.8

billion CHF Fair Value
+5.0% year-on-year

Vacancy rate

4.7

percent vacancy rate
−0.1 percentage points year-on-year

Project pipeline

2.0

billion CHF investments
unchanged year-on-year

NAV

71.9

CHF per share after deferred taxes
+6.1% year-on-year

EPS

4.1

CHF excl. revaluations and deferred taxes
+4.8% year-on-year

Distribution

3.8

CHF gross per share*
unchanged year-on-year
*Proposal to the annual general meeting

Dear Shareholders

Continued demand for prime investment properties has ensured good growth in real estate markets. Under these conditions, and thanks to active portfolio management, Swiss Prime Site once again has very good results to report for the 2019 financial year.

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Continued demand for prime investment properties has ensured good growth in real estate markets. Under these conditions, and thanks to active portfolio management, Swiss Prime Site once again has very good results to report for the 2019 financial year.

Operating income rose by 3.7% to CHF 1 258.8 million, with the Real Estate and the Services segments making a positive contribution to this pleasing growth. The core real estate business increased income by 2.0%. Real estate-related Services increased their contribution to the group by 4.8% compared to the previous year. The value of the real estate portfolio grew by 5.0% to CHF 11.8 billion during the course of the year. The vacancy rate fell to 4.7% [4.8%] and, together with an attractive net yield of 3.5% [3.6%], reflects the quality of the portfolio. Profit rose significantly to CHF 608.5 million [CHF 310.9 million]. In addition to operating improvements, higher revaluations in the real estate portfolio and a one-off positive tax effect caused by tax cuts in some cantons contributed to this pleasing result.

For 2020, Swiss Prime Site expects economic and political conditions to be similar to those of the previous year. This should create a wide range of opportunities for both us and the real estate industry. In 2020, completed project developments, active asset, portfolio and vacancy management, recurring income from real estate developments and the continued realisation of the project pipeline will have a positive impact on the operational and strategic goals in the core real estate business. We expect solid contributions from the real estate-related Services segment. Selling the Tertianum Group will result in a one-off increase in profit excluding revaluations and deferred taxes. We will maintain an attractive dividend policy.

I would like to thank our valued shareholders, customers and partners for your trust and support. My thanks also go to all employees and the management across the entire Swiss Prime Site Group. In my time as a member of the Board of Directors and as its Chairman, we have all worked together to help Swiss Prime Site become a successful company in the real estate industry.

Prof. em. Dr. Hans Peter Wehrli
Chairman of the Board of Directors

Annual Report for the year 2019

2019 was a successful year for Swiss Prime Site. Operating income rose by 3.7% to CHF 1 258.8 million, with both the Real Estate and the Services segments making a positive contribution to this pleasing growth. The core real estate business increased income by 2.0%.

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2019 was a successful year for Swiss Prime Site. Operating income rose by 3.7% to CHF 1 258.8 million, with both the Real Estate and the Services segments making a positive contribution to this pleasing growth. The core real estate business increased income by 2.0%. Real estate services increased their contribution to the group by 4.8% compared to the previous year. The value of the real estate portfolio grew by 5.0% to CHF 11.8 billion during the course of the year. The vacancy rate fell to 4.7% [4.8%] and, together with an attractive net yield of 3.5% [3.6%], reflects the quality of the portfolio. Profits rose significantly to CHF 608.5 million [CHF 310.9 million]. In addition to operating improvements, increases in value in the real estate portfolio and a one-time positive tax effect arising from tax reductions in some cantons contributed to this result. Swiss Prime Site anticipates that operating results will improve across 2020 before revaluations and deferred taxes. This includes a material profit from the sale of the Tertianum Group.

After a good start to the year, the Swiss economy had a subdued performance in the second half of 2019. Global uncertainty led to weaker international demand for Swiss goods and services, while the revaluation of the Swiss franc also hindered growth. As a result, the domestic economy slowed down despite generous refinancing opportunities. However, attractive interest rates for real estate and high demand for prime investment properties led to growth in Swiss Prime Site’s area of the real estate market. Under these conditions, and thanks to active portfolio management, Swiss Prime Site once again has good results to report for 2019.

The core real estate business contributed the lion’s share to the growth of the group. Viewed over the whole of the 2019 financial year, 128 000 m2 (~8% of rentable space) was let or re-let. Swiss Prime Site Immobilien made some adjustments to the portfolio selling smaller properties during the course of the year. The sale of commercial floor space in condominium ownership of a building in the Espace Tourbillon project in Geneva is proceeding as planned. The first sales of various plots were completed in the second half of the year. Some tenants have already moved into the modern and architecturally open YOND in Zurich-Albisrieden. At the Schönburg in Berne, almost all of the 142 residential properties and retail spaces have been handed over to tenants. The hotel with 180 beds is scheduled to open in 2020. Additional projects under construction, with a total of around CHF 560 million in the pipeline, are well under way. The existing buildings in the major JED project in Schlieren will be tailored to the requirements of the two anchor tenants. In the second half of 2019, a catering provider was selected to operate a range of restaurant and event spaces on the site. This should further increase JED’s appeal. In the Stücki Park in Basel, good progress is being made in the construction of the office and laboratory spaces in the first stage. At the DIY store a1 in Oftringen, the first renovated spaces are now back in use. A further eight development projects are currently planned. The total investment in this project totals around CHF 940 million. Both assisted living projects in Olten and Paradiso have been fully let to Tertianum. The construction projects in Lancy (Alto Pont-Rouge) and Basel-Stadt (Stücki Park) are in demand. The building permit for the JED new building (2226) in Schlieren has been issued. The architecture tender for the maaglive project in Zurich-West started in autumn 2019.

The Services segment grew in line with expectations. In a challenging market, Wincasa slightly increased managed real estate assets to CHF 71.0 billion. At the same time, the digital transformation of the business model is proceeding at full speed. Jelmoli expanded its range of services to optimise the customer experience on offer. As well as a Breitling bar, Pallas Kliniken opened its new aesthetics flagship location in the premium department store in the heart of Zurich in 2019. Tertianum made more progress with its growth strategy than planned, increasing operating efficiency and adding value for guests by improving its digital offering. Ahead of schedule, Swiss Prime Site Solutions renewed the contract to collaborate with the Swiss Prime Investment Foundation and significantly increased its assets under management compared to the previous year to CHF 2.3 billion.

Operating income

in CHF Mio.01.01.– 31.12.201801.01.– 31.12.2019Change in %
Real Estate segment509.2519.52.0
   Rental income from properties434.4437.30.7
   Income from real estate developments72.879.89.7
   Other operating income2.02.419.6
Services segment790.7828.44.8
   Rental income from propertiesn101.5106.04.5
   Income from real estate services144.4148.12.5
   Income from retail131.3127.8– 2.6
   Income from assisted living396.9423.96.8
   Income from asset management8.513.560.2
   Other operating income8.29.010.3
Eliminations– 85.7– 89.03.9
Total group1 214.11 258.83.7

Swiss Prime Site reported a 3.7% increase in operating income to CHF 1 258.8 million in 2019, with both segments making a positive contribution to this growth. In the core real estate business, performance was in line with expectations and operating income increased to CHF 519.5 million. The increase of CHF 10.3 million or 2.0% was primarily due to the increase in income from real estate developments. Active vacancy management and forward-looking letting and renewal activities also contributed significantly to this result. The property portfolio achieved a value of CHF 11.8 billion, growing by 5.0% compared to the end of 2018. As at 31 December 2019, Swiss Prime Site’s stock comprised a total 187 high-quality real estate properties [end of 2018: 190 properties]. At 3.5% [3.6%], the net yield is at an attractive level in the market for prime investment properties. The vacancy rate of 4.7% is slightly lower than the previous year.

In the Services segment, operating income rose by 4.8% to CHF 828.4 million in 2019. Wincasa increased income from real estate services by CHF 148.1 million (+2.5%) compared to the previous year. The digitalisation of the business model and the accompanying cultural change is being systematically implemented. The portfolio of real estate managed by Wincasa reached a market value of around CHF 71 billion. Jelmoli – The House of Brands achieved income from retail of CHF 127.8 million [CHF 131.3 million]. In challenging market conditions, the premium department store accelerated the expansion of its services and brand offerings. Tertianum expanded its network of residential and care centres. The company now has more than 80 locations across Switzerland and achieved income from assisted living of CHF 423.9 million (+6.8%) in 2019. Swiss Prime Site Solutions conducted two capital increases for the Swiss Prime Investment Foundation, resulting in significant acquisitions. Assets under management thus increased from CHF 1.6 billion to CHF 2.3 billion. Income from asset management rose significantly by 60.2% to CHF 13.5 million [CHF 8.5 million].

Operating result (EBIT)

in CHF m01.01.– 31.12.201801.01.– 31.12.2019Change in %
Real Estate segment431.1572.932.9
Services segment47.655.516.6
Total group478.6628.331.3

Swiss Prime Site’s operating result (EBIT) jumped by 31.3% to CHF 628.3 million [CHF 478.6 million]. The Real Estate segment contributed the lion’s share of this increase. EBIT from core business reached CHF 572.9 million (+32.9%). This includes revaluations of CHF 204.4 million [CHF 68.3 million]. The growth reflects the generally high appeal and quality of the real estate in the portfolio. In particular, the property at Müllerstrasse 16, 20 in Zurich made a major contribution to this growth due to a big revaluation gain after a new, long-term contract was signed. As at the end of 2019, the weighted average real discount rate stood at 3.06%. This was 16 basis points below the previous year’s figure. Excluding revaluations, EBIT also rose by 3.4% to CHF 424.9 million [CHF 411.1 million]. The pro rata pre-tax profits of the sold development projects in Plan-les-Ouates (Espace Tourbillon) and Berne (Weltpost Park), a retail property in Geneva sold in the first half of the year and additional sales in the second half of 2019 totalled CHF 37.6 million. The operating expenses of the Real Estate segment increased by CHF 6.3 million to CHF 171.4 million [CHF 165.1 million]. This increase is primarily due to expenses in connection with the property developments sold.

The Services segment produced EBIT of CHF 55.5 million [CHF 47.6 million]. Tertianum and Swiss Prime Site Solutions achieved particularly strong operating results. The growth of the network and efficiency gains enabled Tertianum to contribute to this growth. With two capital increases and several portfolio acquisitions for the Swiss Prime Investment Foundation, Swiss Prime Site Solutions almost doubled its results. Despite the transformation process, Wincasa almost maintained its results from the previous year. In 2020, the real estate service provider is set to increase investment in digitalising the business model. Jelmoli’s results were less than the previous year’s due to the challenging bricks-and-mortar retail trade environment. The operating expenses of the Services segment rose by 3.9% to CHF 771.9 million [CHF 742.6 million]. The increase of CHF 29.3 million is due to increased personnel costs connected to the growth of the group company Tertianum. The Swiss Prime Site Group employed a workforce totalling 6 506 persons [6 321] on the balance sheet date.

Profit

Swiss Prime Site achieved a large profit of CHF 608.5 million [CHF 310.9 million] in 2019. This was due to operational improvements, higher revaluations and the release of deferred tax liabilities amounting to CHF 172.5 million from cantonal tax rate reductions. Attractive refinancing and higher recognised borrowing costs connected to real estate developments reduced financial expenses to CHF 70.7 million [CHF 75.8 million]. Excluding revaluations and deferred taxes, profit amounted to CHF 315.7 million (+9.7%). Earnings per share (EPS) rose clearly to CHF 8.00 [CHF 4.27]. Excluding revaluations and deferred taxes, EPS was CHF 4.14 [CHF 3.95], including an increase of 4.6% in the weighted number of shares.

in CHF m01.01.– 31.12.201801.01.– 31.12.2019Change in %
Operating result (EBIT)478.6628.331.3
Financial expenses– 75.8– 70.7– 6.7
Financial income1.21.962.3
Income tax expenses– 93.149.0– 152.6
Profit310.9608.595.7
Profit excluding revaluations and deferred taxes287.8315.79.7

Balance sheet figures

Swiss Prime Site issued two bonds on the capital market in 2019 – an 8-year, 1.25% bond of CHF 350 million and a 12-year 0.375% bond of CHF 170 million. The weighted average interest rate fell to 1.2% [1.4%]. The weighted average residual term to maturity of interest-bearing financial liabilities was 4.2 [4.3] years. The comparison between the interest rate on financial liabilities of 1.2% and the net yield of 3.5% achieved on the property portfolio shows that the interest rate spread remains attractive at 2.3% [2.2%].

As at the end of 2019, the equity ratio of Swiss Prime Site stood at solid 44.4% [43.9%]. The loan-to-value ratio of the property portfolio was 45.7% – virtually unchanged from the previous year [45.3%]. At CHF 71.87 per share, the NAV after deferred taxes was 6.1% higher than the previous year’s figure. This takes into account the withholding tax-free distribution of contribution reserves of CHF 3.80 per share as at 4 April 2019. Swiss Prime Site’s return on equity reached 11.5% [6.4%] and is above the Company’s long-term target, primarily due to the aforementioned one-off effect.

 in31.12.201831.12.2019Change
in %
Equity ratio%43.944.41.1
Return on equity (ROE)%6.411.579.7
Net property yield%3.63.5– 2.8
Weighted average interest rate on financial liabilities%1.41.2– 14.3
Weighted average residual term to maturity of interest-bearing financial liabilitiesyears4.34.2– 2.3
Loan-to-value ratio of property portfolio (LTV)%45.345.70.9
NAV before deferred taxes per share1CHF83.4086.343.5
NAV after deferred taxes per share1CHF67.7471.876.1

1 Services segment (real estate-related business fields) included at book values only

Outlook

For 2020, Swiss Prime Site expects the economic and political conditions to be similar to those of the previous year. This should create opportunities, for both the Company and the real estate industry. The completion of development projects, active asset, portfolio and vacancy management, recurring income from real estate development projects and the realisation of the project pipeline will help the group achieve its operational and strategic goals in the core real estate business in 2020. Swiss Prime Site anticipates contributions from the real estate-related Services segment as planned. Selling the Tertianum Group will lead to increased profit before revaluations and deferred taxes and to a change in the income statement and balance sheet structure. The Company will maintain an attractive policy on dividend distribution to shareholders.

From box-ticking to impact

We are used to receiving «non-financials» under the label of «sustainability» as a kind of ancillary company report offering a look back over the past financial year. This practice reveals a lot about the significance attributed to non-financials – and demonstrates that companies’ non-financial achievements are hugely underrated. When integrated correctly, non-financials enable strategic targets to be set and put the focus on long-term value creation.

Swiss Prime Site Stakeholder Finance

Nowadays, sustainability features on companies’ agendas across the board. The regulatory environment is increasingly set up in a way that makes the topic unavoidable, for example in the form of the EU’s CSR regulations. Another positive development is the improvement in the quality of reporting, not least thanks to the standards provided by the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC). These standards not only help to make the range of different non-financial topics more concrete, but also improve comparability.

A glance at their implementation, however, frequently leads one to suspect that this is only the beginning. From the perspective of company management, sustainability often remains «a topic», but not «the topic». The question that seriously needs to be asked is this: is consistent dedication to sustainability goals an integral part of the business model, or is it just part of the company image? And how does this approach change our usual way of thinking – one which, in a business context, often differentiates between «hard» and «soft» performance indicators?

Non-financial KPIs an indication of long-term value creation

A modern view of sustainable management sees a company as a «value creation machine» that creates value in a variety of different ways. Financial success is supplemented by value creation for customers, employees, society and the environment. This is the approach taken by Swiss Prime Site, the largest listed real estate company in Switzerland. Building on the GRI sustainability reporting guidelines, which were introduced several years ago, the 2017 Sustainability Report applied the principles of «integrated reporting» for the first time.

This had various implications. Firstly, Swiss Prime Site’s business model and that of its group companies was presented as an «integrated value creation model». Secondly, it offers a different perspective in terms of time frame. The focus is increasingly on a forward-looking perspective and the development of long-term goals. In addition, trends are analysed and the risks and opportunities for future development assessed. The reporting itself thus becomes a strategic management tool. Thirdly, a business model requires input in order to achieve output and to have an impact. To achieve this, Swiss Prime Site applies the six capitals of the IIRC standard: financial capital, manufactured capital (relating to infrastructure), intellectual capital, human capital (in the form of employees), relationship capital (relating to customers and stakeholders) and natural capital. In the report, explicit KPIs for both input and output in all Swiss Prime Site’s business areas were developed for the first time. This process is by no means over. The capitals mindset will become part of the company culture as a management instrument and increase the focus on effective long-term success factors.

Non-financials as early indicators

Financial success remains the main focus. Non-financials often run on a different time scale and, if correctly integrated and interwoven, can act as early indicators of financial success that will only become measurable at a later date. This is evident with regard to such issues as customer and employee satisfaction, but less so in the case of, say, climate change. Swiss Prime Site has set a long-term goal and wants to do its part in limiting global warming to under 2°C. This science-based target requires that the property portfolio and the management of the group companies be analysed in detail with regard to CO2 emissions. As this not only includes direct energy usage in the properties but also the supply chain and use by third parties, meaningful performance indicators need to be gradually introduced. At the same time, assessments based on climate change scenarios are being developed which will help build resilience against environmental risks that threaten the property portfolio. Alongside contributions to environmental protection, assurance is needed that the properties can continue to be operated comfortably for users in the long term in various climate scenarios within a reasonable budget.

Integrated thinking as the basis for adaptability

At Swiss Prime Site, sustainability and innovation are managed in the same division. This enables an integrated approach to value creation. Take an example: in 2019, Swiss Prime Site is addressing the overarching topic of climate change. During innovation and accelerator workshops, participants develop and evaluate ideas for new services while considering the wide-ranging potential negative effects of global warming and the associated health risks, regulatory requirements, etc. The capitals are applied right away when assessing the ideas, and additional uses and the non-financial impact are considered alongside the financial perspective. This strengthens the overall capacity to anticipate future developments and react more quickly to possible changes – in other words, it improves the company’s ability to adapt.

The original text by Urs Baumann and Dr Stephan Lienin was published in the article «From box-ticking to impact» in edition no. 14 of «The Reporting Times», the Center for Corporate Reporting (CCR)’s magazine.

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