Financial commentary
Financial commentary
2023 was a successful financial year for Swiss Prime Site. We further improved our operating performance and mitigated the impact of higher interest rates thanks to our prime portfolio and strong financial position. We also streamlined the portfolio, laying the strategic foundations for a promising outlook, which will also simplify and improve the comparability of our financial data. Ongoing high demand for modern, centrally located spaces remains the driving force of our success. We are delighted to have successfully completed our largest projects in the pipeline, further strengthening our position in the market.
In the 2023 financial year, we resolutely pushed ahead with the implementation of our strategic goals – particularly the focus on our core competency in the real estate business. One important step was the sale of Wincasa, our property management company. This meant financial reporting had to be modified in accordance with IFRS 5 («discontinued operations»). As Wincasa is no longer part of ongoing operations, the income statement for 2023 will be disclosed separately and the figures of the previous year adjusted accordingly. This makes it easier to compare our financial figures. We also introduced segment reporting for the core areas of Real Estate and Asset Management. A third segment, «Retail», is added until Jelmoli winds down operations at the end of 2024.
In the reporting year, there was significant like-for-like (LfL) growth in income from property rentals of 4.3% driven in particular by indexation, successful re-lettings and a further reduction in vacancies. On an absolute basis, too, we increased rental income to a record high of CHF 438 million in 2023, despite divestments under our capital recycling strategy (effect of sales CHF – 9.9 million). Strong demand for modern, central office buildings ensured a good uptake of new leases in sites such as the Prime Tower, the Medienpark in Zurich and the Messeturm in Basel. We attracted numerous first-class tenants from the private and public sectors, such as Zurich Insurance and the cantonal administration in Bern, Google in Zurich, and BNP Paribas in Geneva. This further strengthened our portfolio of tenants. The vacancy rate fell again to a record low of 4.0% [4.3% in the previous year] while the weighted average unexpired lease term (WAULT) remained broadly stable at 5.0 years at 2023 year-end.
On a fair value basis, our portfolio boasted a stable value of CHF 13.1 billion as at the end of 2023 [13.1 in the previous year] and comprised a total of 159 [176] properties. The share of development properties amounted to CHF 0.9 billion [1.1]. In 2023, we had to untertake negative revaluations of CHF –250 million [+170], which corresponds to 1.9% of the starting basis for the year. Devaluations were seen in most areas of the portfolio, driven by higher discount rates. We mitigated the negative discount rate effects through improved rentals in most properties. In our development projects, we achieved value growth of CHF 19 million. In the fourth quarter of 2023, we handed over our largest development projects – the Alto Pont-Rouge office buildings in Geneva and Müllerstrasse in Zurich – to the tenants as planned and in 2024 we expect them to start making a significant contribution to rental income.
In the course of the year, we sold 16 properties and campuses that no longer fit our portfolio, with the largest of them located in Olten and Berlingen. We sold the properties for a total of CHF 280 million, resulting in an average profit of 7% above the last appraisal value. After a long period without any purchases, we made two selective property acquisitions towards the end of the year: a smaller building in Basel, adjacent to an existing property, and the «Fifty-One» building in Zurich-West. Through this active portfolio management, we are further improving our real estate holdings and focusing on new, centrally located, sustainable and larger properties that allow for optimal property management.
In the first half of the year in particular, there was clear restraint on the part of investors in the Asset Management division. With the downturn in the stock and bond markets the preceding year, coupled with relatively stable property prices, many institutional investors had an increased weighting in real estate and made very few new investments. Despite these challenges, we increased our assets under management (AuM) by 9% to CHF 8.4 billion [7.7 in the previous year]. We achieved this primarily through organic growth and reinvestments as well as contributions in kind from pension funds and other investors.
In the reporting year, revenues from Asset Management decreased by 4.4% to CHF 49.7 million [52.0]. This decline was mainly due to lower new issue volumes as well as fewer transactions than in the previous year. Recurring fees from construction development and other consultancy services only partially offset this decline. Through cost optimisation and economies of scale, we compensated for a good proportion of this decline and this segment’s contribution to EBIT decreased by less than 10%. The great resilience of Asset Management is also reflected in the greater stability that has come with our growth in size: 77% of earnings are now recurring income [63%].
The consolidated EBIT excluding revaluations reached CHF 403 million [380 in the previous year]. Operating expenses reduced significantly to CHF 269 million with lower real estate, personnel and other costs. The Asset Management business at Swiss Prime Solutions contributed CHF 27 million to the consolidated EBIT, while Jelmoli’s retail business incurred a small loss of CHF –1 million due to reduced consumer confidence, especially in the fourth quarter. The interest expenses on our financial liabilities rose to CHF 58.5 million [40.1], driven by higher reference interest rates and regular refinancing. Total net financial expenses were CHF 76.3 million, CHF 14.3 million of which was the result of fair value adjustments to our convertible bonds due to the higher share price at the end of the year. This resulted in a consolidated profit after revaluations of CHF 236.0 million [404.4], CHF –250.5 million of which was due to revaluations and CHF 149.3 million to the one-off profit from the sale of Wincasa. FFO I (operating cash flow before divestment effects) rose by 1.3% to CHF 4.05 per share [4.00]. The intrinsic value (EPRA NTA) per share fell marginally to CHF 101.52 (–1.1%). The Board of Directors will propose a distribution of a dividend of CHF 3.40 per share, which remains unchanged to the previous year, to the Annual General Meeting on 19 March 2024. The amount represents 82% of the realised FFO I and, based on our year-end closing stock price, the resulting dividend yield is an attractive 3.8%.
We have diligently maintained our conservative financing strategy with a strong equity base. The financing ratio of the real estate portfolio (loan-to-value, LTV) was 39.8% as at the end of the year [38.8% in the previous year]. The slight increase was mainly due to the revaluation of the real estate portfolio as well as the two acquisitions at the end of the year. Under our capital recycling strategy, funds freed up from property sales and the sale of Wincasa were used for our development projects and the targeted acquisition in Zurich-West. Interest-bearing borrowed capital without leasing stood at CHF 5.4 billion as at the balance sheet date and was comprised of a broad range of sources in the banking and capital market. The average term reduced slightly to 4.6 years [5.0].
The average interest rate increased to 1.2% [0.9%] as at the balance sheet date, with 87% [78%] of the interest fixed. 86% of our assets were unencumbered as at the balance sheet date, which, together with the low financing ratio, was the basis for our A3 credit rating from the rating agency Moody’s. As at the end of the year, we had unused, contractually guaranteed financing lines of CHF 819 million which allows us to continue operating with a very high level of operational and financial flexibility.
In 2023, we successfully refinanced or extended CHF 2.9 billion of our borrowed capital with a sustainability link. Each extension of our banking facilities was set at one year. This means they are now extended until 2028 and 2029, with an additional extension option of one year each. Under our «Green Finance Framework», we also successfully placed CHF 425 million of bonds on the Swiss and international capital markets, and with record low credit spreads for our company.
For 2024, we are optimistic about our high-quality real estate portfolio and leading asset management franchise.
In the Real Estate segment, we handed over our building on Müllerstrasse as well as a large proportion of the spaces in Alto Pont-Rouge to the tenants by the end of 2023. In 2024, the last two new laboratory buildings in Stücki Park in Basel will also be completed, and we expect Tertianum to move into the Lugano site by the end of the first quarter. Meanwhile, we will maintain our capital recycling strategy and sell more properties to finance our growth investments without using borrowed capital. This will allow us to continue focusing our portfolio on prime locations with modern, sustainable spaces.
We are anticipating further profit growth for our Asset Management area. Our teams have noted a more positive tone in discussions with investors, fuelled by the renewed decline in long-term interest rates, and we expect this attitude to be reflected in a stronger appetite for investing. At the same time, we are confident that as a strong independent asset manager, we can gain market share.
Throughout the company, we will continue to significantly cut back our cost base with our leaner structure, as announced. Based on the current yield curve and expiring financing, we expect financing costs to rise only marginally in 2024.
In summary, we are expecting a vacancy rate of less than 4% and the LTV to remain below 40% for the real estate portfolio for financial year 2024, a further increase in assets under management at Swiss Prime Site Solutions to more than CHF 9 billion, and further growth in FFO I from continuous operations to CHF 4.10 – 4.15 per share. We are confident we can achieve these goals for our shareholders as a basis for an attractive, self-financed dividend.