Zug Estates Group achieves solid overall results

The 2020 financial year was shaped by the impacts of the COVID-19 pandemic, even at Zug Estates. On the one hand, the company succeeded in substantially boosting its property income, as expected, and completed the Aglaya promotional project on schedule. On the other hand, many tenants were forced to close their businesses during the government-mandated lockdown. The fact that international business travel ground to nearly a complete halt caused sales in the hotel & catering segment to decline substantially.

Net income of CHF 32.3 million was generated in the 2020 financial year as a result. This was CHF 43.7 million less than the CHF 76.0 million generated in the previous year, which not only included substantially positive revaluation effects but also several different special effects in the amount of CHF 21.3 million, such as gains on the sale of an investment property that was not in line with our strategy and a non-recurring positive tax effect from a reduction in the deferred tax rate.

Despite further strengthening of the real estate segment, the negative trend in the hotel & catering segment resulted in lower year-over-year net income excluding revaluation and special effects of CHF 25.9 million (previous year: CHF 31.4 million).

Increase in property income with a substantial decline in hotel and catering sales
The full-period effect of rental agreements as well as a few first-time rentals increased rental income by 6.1%, from CHF 54.5 million to CHF 57.8 million. This figure factors in rent reductions of CHF 0.7 million granted in connected with the government-mandated lockdown aimed at containing the COVID-19 pandemic.

The sharp, pandemic-related decline in the accommodation business led to a year-over-year drop in sales of CHF 9.6 million or 57.8% to CHF 7.0 million. Systematic cost-cutting efforts kept gross operating profit (GOP) in positive territory at 9.1% (previous year: 39.8%).

The sale of the final 49 of a total of 85 condominium apartments in the Aglaya project generated CHF 72.5 million in income and promotional profit before tax of CHF 9.5 million (previous year: income of CHF 45.6 million and promotional profit before tax of CHF 7.9 million). For the Aglaya promotional project as a whole, this translates to a return of 17.3% on our investment.

As expected and announced, renovation work at the Metalli complex in Zug as well as a general increase in our portfolio of properties have caused property expenses to rise by CHF 1.2 million or 15.6%, from CHF 7.8 million to CHF 9.0 million.

The effects mentioned above reduced operating income before depreciation and revaluation from CHF 53.4 million to CHF 49.6 million, a CHF 3.8 million decline.

The average 7-basis-point reduction in the discount rate triggered by the markets is offset by more conservative overall estimates of market rents and the structural vacancy rate for retail space, as well as a one-time adjustment to the construction cost forecast for the completed construction site 1 development project. Overall, this resulted in a slightly negative revaluation result of CHF 2.2 million, which is equal to 0.1% of the corresponding portfolio value. There was a positive revaluation result of CHF 19.6 million in the previous year.

EBIT subsequently declined from CHF 70.5 million to CHF 43.7 million (-38.0%).

As announced, a substantial slowdown in construction activity meant that financing costs were capitalized at a lower rate, which caused financing costs to increase from CHF 5.6 million to CHF 7.2 million, even despite another reduction in the average interest rate.

Tax expenditure amounted to CHF 4.3 million. A revision of the tax laws in the canton of Zug gave rise to a one-time release of deferred taxes in the amount of CHF 20.3 million and thus tax income of CHF 11.0 million.

Investments raise value of portfolio to CHF 1.65 billion
The portfolio's market value rose by 1.5%, from CHF 1.63 billion to CHF 1.65 billion. The last building on construction site 1 in Rotkreuz was commissioned in the first half of 2020, and another 2.25% co-ownership share of the Miteigentümergemeinschaft (MEG) Metalli was acquired in the second half of the year. This boosted the company's co-ownership share of MEG Metalli to 74.5%. A total amount of CHF 36.7 million was invested in the portfolio's development during the reporting period.

Vacancy rate higher due to completions
The completion of building S6 on the Suurstoffi site in Rotkreuz added another 4'900 m² in high-quality office space to the portfolio in mid-2020. As a result, the vacancy rate of 3.3% on December 31, 2019, rose to 5.0% on December 31, 2020. After adjustment for first-time rentals, the vacancy rate remained unchanged at 1.5%. The weighted average unexpired lease term (WAULT) of 6.8 years (6.8 years on December 31, 2019) was high for the industry.

Marketing successes despite the challenging environment
Even in the challenging market environment that has arisen as a result of the impact of the COVID-19 pandemic, the company achieved some encouraging marketing successes. While demand for large-scale office spaces is currently restrained, residential products are still in extremely high demand in both Zug and Rotkreuz and demand remains intact for both retail and catering space.

Rental contracts for space totaling more than 5'700 m² and rental income of more than CHF 2.6 million p. a. were renewed or extended during the year under review. While the contract extensions for the Suurstoffi site in Rotkreuz mainly related to office space, new contracts were signed with retail and catering tenants in the City Center site. One of these was a contract concluded with Familie Wiesner Gastronomie AG, which will open its second Miss Miu Korean-themed restaurant in the Metalli shopping area in summer/fall 2021.

Project development with a focus on the Metalli Living Space
Development work on the Suurstoffi site has progressed rapidly over the past few years. Following the completion of construction site 1 in the first half of 2020, the final two buildings (S43/45) featuring total rentable space of around 18'000 m² are currently waiting to be built. The board of directors has given the construction phase for these two buildings its go-ahead and the project will be worked out by the second quarter of 2021. Once the finalized construction project is ready, the decision about when to start construction will be reached taking demand and current market trends into consideration.

After the City of Zug and Zug Estates presented the results of their joint planning process for the 'Metalli Living Space' in March 2020, the reference project based on that process as well as requests for changes to both development plans affected were prepared along with all relevant documents. Requests for changes to the development plans were submitted to the City of Zug in September 2020. The legally binding, modified development plans are expected to take effect in 2022/23.

Nearing the goal of carbon-free operation of the entire portfolio
Zug Estates made substantial headway again in 2020 toward its goal of operating its entire real estate portfolio carbon-free. The Metalli complex was connected to the Circulago lake water district on schedule in April 2020, meaning that the entire complex can now have its heating and cooling requirements covered nearly carbon-free by water from Lake Zug. Contracts to connect the remaining properties in the City Center site were signed in December 2019. Commissioning is to take place in stages until 2025 at the latest. From then onward, Zug Estates will be able to operate its entire portfolio nearly carbon-free.

When it comes to sustainability, Zug Estates sets high standards for other investments in its portfolio, as well. The installation of a carbon-neutral air conditioning system in the rooms of Parkhotel Zug was also completed on schedule in April 2020 and now enables guests to enjoy a considerably higher level of comfort. What's more, customers visiting the Metalli shopping area have been able to take advantage of e-vehicle charging stations since early June. Two of the six stations are high-power, rapid charging stations, the very first to be installed in the City of Zug.

Solid capital base
The influx of funds from the sale of the final apartments in the Aglaya building enabled the Group to reduce its interest-bearing debt from CHF 597.4 million to CHF 591.8 million, even despite payment of a special dividend. Interest-bearing debt as a percentage of total assets amounted to 36.4% compared to 36.1% in the previous year. This debt had an average maturity of 4.3 years (previous year: 5.2 years), whereby interest-bearing debt is subject to an average interest rate for the period that has been reduced from 1.4% to 1.3%. With an equity ratio of 56.3%, 1.6 percentage points higher than in the previous year, Zug Estates still has a very solid equity base.

Ordinary dividend raised and payment of a special dividend
In line with the announced gradual increase in the ordinary dividend up to a maximum of two-thirds of net income, the board of directors will propose to the general meeting of shareholders that the dividend be increased by 9.7%, from CHF 31.00 to CHF 34.00 per series B registered share. Additionally, the company also wants shareholders to participate in this year's proceeds from the sale of the Aglaya promotional project. In light of the challenging economic environment and in keeping with the principle of prudence, the board of directors will not increase the total amount of the distribution. Instead, it will request that the general meeting of shareholders approve a special dividend of CHF 10.00 per series B registered share. The total amount of the distribution would therefore remain unchanged year over year at CHF 44.00 per series B registered share.

Outlook for 2021
In the real estate business unit, we anticipate that rental revenue will increase in 2021, as well, an assessment we arrived at based on full-year rental income, increased rents agreed in previously concluded rental agreements as well as some newly rented space. Property expenses will be lower than in the previous year due to a reduction in the amount of renovation work performed at the Metalli site.

Developments in the hotel & catering segment hinge largely on how the COVID-19 pandemic plays out and both sales and GOP are difficult to forecast in the current market environment.

For the 2021 financial year, we expect operating income before depreciation and revaluation to be lower year over year due to the absence of the special effect from the sale of the Aglaya apartments.

A definitive assessment of how this will impact net income excluding revaluation and special effects is not possible.

Report dated March 5, 2021
The detailed report on the financial year is available on our website:
https://www.zugestates.ch/en/mn/downloads.html

A virtual press conference will be held in German today at 11 a.m. At this time, Patrik Stillhart (CEO) and Mirko Käppeli (CFO) will present the 2020 annual results and follow up with a Q&A session.

Please use the link below to register for the conference. We look forward to welcoming you. https://www.zugestates.ch/de/investor-relations/bilanzmedienkonferenz.html

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