Financial commentary

Consolidated statement of comprehensive income

The 2012 financial year closed with operating net profit of CHF 105 million, which, as anticipated, is below the previous year’s record result (2011: CHF 115 million). The CHF 10 million decrease breaks down into CHF 3 million in the Real Estate division and CHF 7 million in the Projects & Development division.

On the basis of an agreement between SIX Exchange Regulation and Allreal on various accounting matters, the 2011 figures were restated. Accordingly, the previously published operating net profit of CHF 109 million for 2011 was adjusted upward by CHF 6 million to CHF 115 million.

The Real Estate division reported only an insignificant year-on-year decline in rental income to CHF 142 million despite a rise in vacancies. Like-for-like rental growth was a slightly negative –0.61% (commercial real estate –0.67%/residential real estate –0.25%). Real estate expenses of 13.8% of rental income were moderately higher than in the previous year, but still within the long-term standard range of 13% to 15%. Owing to upward revaluations of yield-producing properties in the preceding years and a higher accumulated vacancy rate of 5% of target rental income (2011: 4.4%), the net yield decreased to 4.9%. The highest vacancy rates were recorded in the commercial properties Luberzen Urdorf and Brandschenkestrasse Zurich.

The valuation of investment real estate by an external real estate valuer resulted in a downward correction of CHF 8 million. The lower valuation was attributable to the three investment classes commercial real estate (CHF –9 million), residential real estate (CHF 9 million) and investment real estate (CHF –8 million). In the year under review, the process of upward revaluation was slowed down primarily at the Toni site (stated as investment real estate under construction) as measures to speed up construction resulted in higher investment costs with an ensuing delay in occupation dates and a reduction in income in 2013. The average discount and capitalisation rates for yield-producing properties were lowered by 4 basis points as at 31 December 2012.

The Projects & Development division reported income from business activity of CHF 116 million. The significant 26% increase in the completed project volume lifted fee income, earnings from construction activity and capitalised company-produced assets to CHF 98 million (2011: CHF 81 million). Income from sales Development came to CHF 17 million, despite a value adjustment on the Holengass Meilen project (CHF –1.7 million). To deal with the large amount of work in hand, capacity was again expanded substantially. As a result, operating expenses rose CHF 8 million to CHF 65 million. CHF 4 million of this increase was attributable to the Hammer Retex Group.

Operating tax expense remained stable at CHF 31 million, representing 22.9 percent of net profit before tax. Of this amount, CHF 33 million was allotted to current taxes and CHF –2 million to deferred taxes. As in the previous year, the tax expense reflects high property gains taxes. The effect of deferred taxes resulting from revaluation amounted to CHF –1 million.

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

As at 31 December 2012, the market value of the investment real estate amounted to CHF 3 159 million (31.12.2011: CHF 2 951 million). It comprises commercial real estate (CHF 2 078 million), residential real estate (CHF 453 million) and investment real estate under construction (CHF 628 million). The increase in the value of the real estate portfolio was attributable in part to investments and sales (CHF 204 million), reclassification of development real estate (CHF 12 million) and a negative value correction as a result of revaluation (CHF 8 million). Following the addition of the Favrehof Wallisellen residential construction project, the number of investment properties under construction has risen to six. They represent an investment volume of over CHF 900 million, which is to be released in full by 2014 at the latest.

At approximately CHF 595 million on the balance sheet cut-off date, the book value of development real estate reached a new high. The largest position in the development reserves (CHF 149 million) is the Guggach site in Zurich-Unterstrass with a value of CHF 97 million. Buildings under construction recognised at acquisition costs (CHF 396 million) include a large number of projects scheduled to reach completion in the next two years, the income on which will be reflected in the consolidated financial statements. Comprising 27 residential units, ownership of which has not yet been transferred, the completed projects Aublickweg Au-Wädenswil and Holengass Meilen are stated at CHF 49 million. Following impairment testing, the acquisition costs for the Holengass Meilen project had to be adjusted by CHF 1.7 million.

The takeover of the Hammer Retex Group included, in particular, project and development contracts for third parties as well as property management customers. These positions were valued at CHF 7 million on acquisition and recognised as intangible assets to be depreciated over the period until the end of 2015. A charge of CHF 1.4 million was booked to the consolidated financial statements in the year under review.

Since current investments were refinanced by the 2012 capital increase, net financial debt was CHF 57 million lower year-on-year at CHF 1 538 million. Deferred tax liabilities on the balance sheet cut-off date amounted to CHF 99 million net (31.12.2011: CHF 98 million). Owing mainly to the higher volume of projects completed by the Projects & Development division, trade payables increased to CHF 147 million (31.12.2011: CHF 120 million). Given the numerous transfers of condominium ownership in prospect for the 2013 financial year, downpayments for development real estate increased by a significant CHF 14 million to CHF 32 million.

In the period under review, equity increased by CHF 296 million to CHF 911 million as at the balance sheet cut-off date. Factors that contributed to this growth included the capital increase (CHF 265 million), net profit (CHF 98 million), an improvement in the replacement values of interest rate swaps (CHF 7 million) and the sale of treasury shares (CHF 1 million). CHF 75 million was paid out to shareholders. Amendment of the IFRS standard on employee benefits will impact equity in 2013 by only a marginal CHF 3.4 million (projection as at 31.12.2012).

Consequently, net asset value (NAV after deferred tax) per share rose by CHF 1.65 to CHF 119.90.

Consolidated cash flow statement

A solid business performance led to a high and stable level of operating cash flow before changes in net working capital of CHF 152 million (2011: CHF 162 million). Taking into account the increase in net working capital, cash flow amounted to CHF 151 million. The amounts of CHF 38 million and CHF 41 million, respectively, were used to disburse financial expenses and current taxes. This resulted in a cash flow from operating activities of CHF 72 million (2011: CHF –23 million).

Investment activity remained high in the period under review. At CHF 196 million, investment real estate under construction accounted for the largest share, as was expected. The acquisition of the Hammer Retex Group led to a cash outflow of CHF 2 million. New funds in the amount of CHF 5 million were committed to other property, plant and equipment and financial assets. This resulted in a cash flow from investing activities of CHF 203 million (2011: CHF 176 million).

On the financing side, the capital increase led to a CHF 105.7 million reduction in borrowings. Factoring in the payout to shareholders and the change in treasury shares, a net cash inflow from financing activities of CHF 85.2 million (2011: CHF 236.4 million) resulted.

Financial situation

Allreal’s investment guidelines and the maximum borrowing level stipulated by the credit agreements with the banks define the relevant financial ratios, which were complied with as follows for the entire period under review and as at 31 December 2012: The consolidated equity ratio amounted to 48.7% (minimum 35%), net gearing 80.5% (maximum 150%), interest coverage ratio 5.1 (minimum 2.0) and the borrowing level against investment and development real estate 41.7% (maximum 70%).

As at the balance sheet cut-off date, average interest on financial liabilities amounted to an even lower 2.13 percent compared to the previous year, with a longer interest lock-in period of 54 months (31.12.2011: 2.30%/51 months). Interest-bearing borrowings were secured against changes in interest rates by means of interest rate swaps, fixed-date mortgage loans and bond issues as at the balance sheet cut-off date. In the period under review, a new ten-year interest rate swap with a contract value of CHF 100 million and a fixed rate of 0.78% was concluded to replace a maturing 2.65% derivative in February 2013.

The new debt and continuing low interest rates point to refinancing costs remaining low in 2013 despite an upward trend in bank lending margins.

As at 31 December 2012, the immediately available bank credit lines amounted to CHF 668 million. With these resources, the long average interest lock-in period and the high equity ratio of 48.7%, Allreal has a stable financial basis.

Reflecting the higher number of outstanding shares as a result of the capital increase, the payout ratio of 83.4% of net operating profit is above the maximum value of 75% as specified by the company. Owing to the foreseeable expansion of the portfolio and the related increase in income, the proposed payout of CHF 5.50 per share is both justifiable and reasonable, not least with regard to upholding a consistent dividend policy.

Annual financial statements of Allreal Holding AG

At around CHF 43 million, the net profit was lower than in the previous year (2011: CHF 72 million). In 2012, the subsidiary companies paid dividends of CHF 31 million to Allreal Holding AG, representing only half the amount remitted in the previous year. Despite lower interest rates, net financial income remained constant at CHF 14 million (2011: CHF 13 million) because of an increase in lendings to Group companies.

Other expense and taxes of CHF 2 million were slightly higher than for the previous year.

Compared to the previous year, total assets rose to CHF 1 864 million as a result of the capital increase in May 2012. The funds so accrued were used to refinance the Group companies.

As at 31 December 2012, equity amounted to CHF 1 510 million (31.12.2011: CHF 1 277 million), CHF 495 million of which was allocated to reserves from contribution of capital, which may in future also be paid out tax-free to private shareholders.

The CHF 233 million increase in equity is attributable to CHF 265 million in net proceeds from the capital increase and CHF 43 million in net profit for 2012, offset by CHF 75 million in reserves paid out in April 2012.