Financial commentary

Consolidated statement of comprehensive income

In the 2011 financial year, operating net profit increased to CHF 109 million, which is the equivalent of a rise of 2.7% compared to the record result in the previous year. In the period under review, lower finance expense, significantly higher income from renting investment real estate, as well as unchanged earnings from the Projects & Developments division compared to the previous year contributed to the improvement in the result and offset higher personnel and operating expenses.

Rental income of CHF 142.9 million in the Real Estate division exceeded the previous year’s result by 2.7% owing to expansion of the portfolio. Rates of change of –0.7% and +1.2% respectively (like-for-like rental growth) were recorded on rental income from commercial and residential real estate held on a continuous basis. Real estate expenses of 13.3% of rental income were lower than in the previous year, but still within the long-term standard range of 13% to 15%. At 5.1%, the net yield on the portfolio remained stable at a high level. The cumulated vacancy rate for the 2011 financial year amounted to a very low 4.4% of projected rental income. The largest vacancies are in the commercial properties Zentrumsüberbauung in Wallisellen and In der Luberzen in Urdorf.

The valuation of investment real estate by the external real estate valuer resulted in a gain of CHF 44.7 million, or 1.5% of the entire portfolio’s asset value. Commercial real estate (CHF 11.0 million), residential real estate (CHF 18.3 million) and investment real estate under construction (CHF 15.4 million) all contributed to the higher valuation. The high positive value correction for investment real estate under construction is due to the initial valuation of four projects that were reclassified from development real estate to investment real estate under construction and to the effect of future income moving forward on the time axis in line with the percentage of completion. As at 31 December 2011, the average discount and capitalisation rates for the entire portfolio were lowered by 9 basis points.

The sale of two investment properties resulted in earnings before tax of CHF 0.8 million. The prices obtained were about eight percent above the market values as shown on the balance sheet as at 31 December 2010.

The Projects & Development division reported income from business activity of CHF 108.3 million. As a result of the sharp increase in completed project volume, fee income and earnings from construction activity rose by CHF 2.2 million compared to the same period in the previous year. In addition, earnings from completed projects that accrued cyclically were just CHF 0.4 million less than in the previous year. To deal with the large amount of work in hand, capacity was expanded considerably, as a result of which personnel and other operating expenses rose from CHF 52.9 million to CHF 56.3 million.

Although net financial debt rose by about CHF 276 million, finance expense of CHF 32.3 million was CHF 1.7 million lower than in the previous year. Apart from a very much lower refinancing rate, the higher capitalisation of interest expense of CHF 7.6 million and the lower accrued interest effect resulting from the amortisation of the two bonds of CHF 3.0 million have helped to reduce finance expense.

Operating tax expense increased slightly to CHF 31.5 million, which represents 22.4% of net profit before tax and is, therefore, above the group tax rate of 22%. Of this amount, CHF 26.3 million was allotted to current taxes and CHF 5.2 million to deferred taxes. As in the previous year, tax expenses reflect high expenditure on property gains taxes accruing from project completions in the Projects & Development division. The effect of deferred taxes resulting from the revaluation of investment real estate amounted to CHF 12.9 million.

Consolidated balance sheet and consolidated statement of changes in shareholders’ equity

As at 31 December 2011, the market value of the investment real estate amounted to CHF 2 951 million. It is comprised of commercial real estate (CHF 2 085 million), residential real estate (CHF 444 million) and investment real estate under construction (CHF 422 million). The value of the real estate portfolio increased through acquisitions and sales (CHF 69.1 million), investments (CHF 106.5 million), reclassification of other balance sheet items (CHF 111.9 million) and a positive value correction as a result of revaluation (CHF 44.7 million). Four projects with a total investment volume of CHF 323 million were added to the portfolio of investment real estate under construction. All investment real estate under construction is likely to be transferred to the portfolio of yield-producing properties in 2013 and 2014.

Compared to 31 December 2010, the book value of development real estate grew appreciably by CHF 48.1 million to CHF 504.1 million. The largest item in the development reserves (CHF 226 million) is the Guggach site in Zurich-Unterstrass with a value of around CHF 93 million. All buildings under construction shown on the balance sheet at acquisition cost (CHF 278 million) enjoy attractive profit potential, which after completion will be reflected in the consolidated statement of comprehensive income.

On account of portfolio growth and investment in investment real estate under construction and in development real estate, net financial debt rose by CHF 276 million to CHF 1 594 million. Deferred tax liabilities on the balance sheet cut-off date amounted to CHF 94.6 million net (31.12.2010: CHF 83.5 million). The increase was brought about by the upward valuation of investment real estate as well as by the timing differences between the consolidated financial statements and the individual financial statements of Group companies and was not offset by new deferred tax assets from the valuation of interest-rate swaps. Owing to the higher volume of projects completed by the Projects & Development division, current liabilities increased to CHF 159.1 million (31.12.2010: CHF 110.5 million).

In the period under review, equity increased by CHF 41.1 million to CHF 1 607.4 million as at the balance sheet cut-off date. Net profit of CHF 140.8 million and the conversion of convertible bonds into shares (CHF 0.1 million) contrasted with a payout of reserves from capital contribution (CHF –74.9 million) and the marked rise in the negative replacement values of derivative financial instruments (CHF –25.0 million). The latter is a consequence of the persistently low level of interest rates, which is reflected in the valuation of interest rate swaps.

Consequently, net asset value (NAV after deferred tax) per share rose by CHF 3.05 to CHF 117.75.

Consolidated cash flow statement

In the period under review, the continuing positive business developments compared to the previous year have resulted in a stable operating cash flow before changes in net working capital of CHF 152.9 million (2010: CHF 151.7 million). Taking into account the increase in net working capital of CHF 114.9 million, cash flow amounted to CHF 30.8 million. The amounts of CHF 35.1 million and CHF 25.8 million, respectively, were used to pay for financial expenses and taxes. This resulted in a cash flow from operating activities of CHF –22.9 million (2010: CHF 36.5 million).

Investment activity continued in the period under review. The acquisition of a commercial property in Le Grand-Saconnex for CHF 74.3 million and value-increasing investments in existing yield-producing properties of CHF 0.4 million exceeded the sale of two yield-producing properties for CHF 10.3 million net. The ongoing project activity in investment real estate resulted in cash-out investments of CHF 106.5 million. New funds in the amount of CHF 4.6 million were committed to other property, plant and equipment and financial assets. This resulted in a cash flow from investing activities of CHF –175.5 million (2010: CHF 52.2 million).

On the financing side, the investment activity resulted in an increase in borrowings of CHF 311.1 million. Including the distribution to the shareholders and the change in treasury shares, net additions from financing activities amounted to CHF 236.4 million (2010: CHF 21.2 million).

Financial situation

Allreal’s investment guidelines and the maximum borrowing level outlined by the credit agreements with the banks define the relevant financial ratios, which were reported as follows for the entire period under review and as at 31 December 2011: The consolidated equity ratio amounted to 43.8% (minimum 35%), net gearing 99.2% (maximum 150%), interest coverage ratio 5.4 (minimum 2.0) and the borrowing level against investment and development properties 48.2% (maximum 70%).

At the end of the financial year, average interest on financial liabilities amounted to a very low 2.30% (31.12.2010: 2.59%), at a higher duration of 51 months (31.12.2010: 46 months). Of the interest-bearing borrowings as at the balance sheet cut-off date, 92% was secured against changes in interest rates by means of interest rate swaps, fixed-date mortgage loans, bond issues and convertible bonds. In the period under review, new interest rate swaps for contract values amounting to CHF 150 million were concluded. The weighted duration to maturity of these interest rate swaps amounted to 8.8 years at an average interest rate of 1.81%.

Through the 2.50% bond issue 2011–2016 of CHF 150 million in May 2011, the borrowing level for investment and development properties (loan-to-value) as at the balance sheet cut-off date was held at a very low 38.4% (2010: 37.9%).

As at 31 December 2011, the immediately available bank credit lines amounted to a comfortable CHF 565 million. With these resources, the long duration to maturity of its financial liabilities, the very low cost of refinancing and the respectable equity ratio of 43.8%, Allreal enjoys favourable financing.

The payout ratio of 69% of net operating profit is below the maximum value of 75% as specified by the company.

Annual financial statement of Allreal Holding AG

The net profit of CHF 72.3 million in the 2011 financial year was considerably higher than in the previous year (CHF 61.4 million). In 2011, the subsidiary companies paid dividends of CHF 62.0 million to Allreal Holding AG. Despite one-time expenses amounting to CHF 1.4 million in connection with the bond issue, net financial income increased to CHF 12.9 million (2010: CHF 5.4 million).

Other expense and taxes of CHF 2.6 million were slightly higher than for the previous year.

Compared to the previous year, total assets rose to CHF 1 632.5 million as a result of the 2.50% bond issue 2011–2016 for CHF 150 million. The funds so accrued were used to refinance the Group companies.

As at 31 December 2011, equity amounted to CHF 1 277.3 million (31.12.2010: CHF 1 279.9 million).

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