Financial commentary
Consolidated statement of comprehensive income
The 2014 financial year closed with operating net profit of CHF 109 million, which, as anticipated, is below the previous year’s record result (2013: CHF 116 million). The decline by CHF 7 million is attributable to the Real Estate division, which the previous year posted very high (pre-tax) gains on sales of CHF 20 million.
At CHF 159 million, rental income in the Real Estate division increased by 7.2% in comparison with 2013 owing to expansion of the portfolio and despite a marked rise in vacancies. Like-for-like rental growth came to 0.4%. The cumulative vacancy rate rose to a disappointing 7.9% of target rental income (2013: 4.7%). However, 2015 is not expected to see any further increase in loss of income. Real estate expenses of 15.8% of rental income were up slightly on the previous year. As a result of the increase in vacancy rates and real estate expenses, the net yield fell to 4.5% (2013: 4.8%).
The sale of three yield-producing properties for CHF 54 million resulted in a book gain of CHF 3 million, which is 6% more than the market values as at 31 December 2013.
The valuation of investment real estate led to a fall in value by CHF 6 million and was spread among the categories residential real estate (CHF 23 million), commercial real estate (CHF −28 million) and investment real estate under construction (CHF −1 million). While the valuation of the residential real estate is affected by the persisting pressure on yields, the estimates of the market value of the commercial real estate reflect the rising vacancies and the stagnant to slightly falling rental prices.
The Projects & Development division reported income from business activity of CHF 103 million. The sale of development real estate generated substantial gains of CHF 35 million (2013: CHF 34 million). As a result of a roughly 20% fall in the completed project volume, fee income, earnings from construction activity and capitalised company-produced assets decreased by CHF 9 million to CHF 67 million.
During the period under review, operating expenses (CHF 67 million) benefited from the positive impact of a one-off effect arising from the treatment of staff pension provision. As a result of an adjustment to the pension plan of the Allreal pension fund decided by the Board of Trustees, CHF 4.5 million was credited to personnel expenses.
Net financial expense (CHF 37 million) was impacted not only by a year-on-year decline in capitalised building loan interest of around CHF 5 million, but also by liquidity-neutral accrued interest effects amounting to around CHF 5 million stemming from the convertible bond and bond issues. In 2015, these effects will be very much smaller.
Operating tax expense of CHF 31 million represented 21.9% of net profit before tax. Of this amount, CHF 29 million was attributable to current taxes and CHF 2 million to deferred taxes. CHF 1 million in deferred taxes was credited to the income statement from the revaluation of investment real estate.
Consolidated balance sheet and consolidated statement of changes in shareholders’ equity
As at 31 December 2014, the market value of the investment real estate amounted to CHF 3 514 million (31.12.2013: CHF 3 446 million). The roughly 2% increase in the value of the real estate portfolio was attributable to investments and sales (CHF 205 million), reclassifications from one balance sheet item to another (CHF –131 million) and revaluation (CHF –6 million).
Interest-bearing financial assets increased by a substantial CHF 128 million to CHF 143 million. The largest single position consists of tenant fit-outs at the Toni site which were prefinanced by Allreal and will be amortised by the canton of Zurich over the 20-year rental contract period.
With a book value of CHF 301 million as at 31 December 2014, development real estate declined to a ten-year low. This reflects a cautious strategy on starting new own projects owing to the challenging market environment. In 2014, ownership of development real estate worth CHF 212 million was transferred to third parties. In addition to development reserves (CHF 39 million) and buildings under construction (CHF 167 million), completed real estate (CHF 95 million) make up a large share of this balance sheet item. However, completed real estate includes CHF 34 million in contracts which had already been concluded and are to be carried out in 2015.
As at the balance sheet cut-off date, deferred taxes amounted to CHF 104 million (31.12.2013: CHF 114 million) and other liabilities increased slightly to CHF 268 million (31.12.2013: CHF 254 million).
The period under review saw equity decrease by CHF 15 million to CHF 1 954 million as at the balance sheet cut-off date. Positive factors included the net profit (CHF 104 million) and the disposal of almost all treasury shares (CHF 4 million). By contrast, equity was impacted by payments to shareholders (CHF −88 million) and, reflecting the low level of interest rates, by the valuation of interest rate swaps (CHF −24 million) and the pension fund (CHF −13 million).
Consequently, net asset value (NAV after deferred tax) per share decreased by CHF 1.25 to CHF 122.55.
Consolidated cash flow statement
A gratifying business performance led to an increase in cash flow before changes in net working capital to CHF 159 million (2013: CHF 153 million). Taking into account the significant decrease in net working capital following the sale of development real estate, cash flow amounted to CHF 222 million, which was used partly to pay net financial expenses (CHF 35 million) and current taxes (CHF 29 million). This resulted in a cash flow from operating activities which remained unchanged compared with the previous year at CHF 158 million.
At CHF 235 million, real estate under construction accounted for the largest share of the robust investment activity. Additional investments and sales of yield-producing properties resulted in a total cash flow from investment activities of CHF 199 million (2013: CHF 116 million). The following year can be expected to see investment weaken.
On the financing side, financial liabilities increased by nearly CHF 131 million. Factoring in the payout to shareholders (CHF 88 million) and the decrease in treasury shares (CHF 4 million) produced a net cash inflow of CHF 47 million (2013: CHF 42 million).
Financial situation
Allreal’s investment and financing guidelines and the borrowing level stipulated by the credit agreements with the banks were complied with for the entire period under review. As at 31 December 2014, the consolidated equity ratio amounted to 47.6% (minimum 35%), net gearing 87.9% (maximum 150%), the interest coverage ratio 4.8 (minimum 2.0) and the borrowing level against investment and development real estate 45.9% (maximum 70%).
As at the balance sheet cut-off date, average interest on financial liabilities was 1.93%, with a slightly shorter interest lock-in period of 50 months (31.12.2013: 2.13%/56 months). During the period under review, net financial debt increased by CHF 131 million, reflecting a CHF 206 million increase in drawdowns on bank loans and a CHF 75 million decrease in outstanding convertible bond and bond issues.
Allreal’s financing strategy is aimed at refinancing roughly one third of all financial debt via the capital market. As at the balance sheet cut-off date, there are three bond issues outstanding totalling CHF 425 million, corresponding to 24% of all financial liabilities. The company is therefore likely to have recourse to the capital market in 2015 as well.
As at the balance sheet cut-off date, immediately available credit lines amounted to CHF 543 million, guaranteeing the high degree of financial flexibility needed to expedite major purchases. With borrowing capacity at around CHF 1.3 billion, Allreal has a stable financial base.
Annual financial statement of Allreal Holding AG
Net profit increased by 7% year-on-year to CHF 47.5 million. The increase in dividend income to CHF 38 million more than compensated for the CHF 12 million reduction in net financial income. Other expenses and taxes remained constant at CHF 3 million.
Total assets decreased by around CHF 115 million to CHF 1.86 billion owing to lower financial liabilities. In the first half of 2014, a 1.25% bond 2014−2019 was issued to secure repayment of the CHF 199.8 million 2.125% convertible bond at the beginning of October 2014.
To simplify the legal organisational structure, Allreal Holding AG took over at book values of CHF 66 million the 100% stake in Apalux AG previously held by Allreal Office AG.
As at 31 December 2014, equity amounted to CHF 1 427 million (31.12.2013: CHF 1 467 million), CHF 320 million of which was allocated to reserves from contribution of capital, which may be paid out tax-free to private shareholders.
The CHF 40 million decrease in equity is attributable to CHF 48 million in net profit for 2014, offset by CHF 88 million in reserves paid out in April 2014.