CFO Letter

Roland Friederich, CFO

Ladies and Gentlemen

Züblin closed the 2017/18 finan­cial year with pos­i­tive results. Adjust­ed earn­ings of CHF 6.6 mil­lion led to an increase in share­hold­ers’ equi­ty of 5.5 %. The report­ed loss of CHF 29.3 mil­lion reflects the release of reserves pre­vi­ous­ly recog­nised in equi­ty for cash flow hedges and dis­con­tin­ued oper­a­tions. This reclas­si­fi­ca­tion has no impact on share­hold­ers’ equi­ty. The val­ue of the real estate port­fo­lio increased to CHF 200.1 mil­lion (pre­vi­ous year CHF 198.5 mil­lion) on the bal­ance sheet date. The net yield on the real estate port­fo­lio remained sta­ble at 3.7%. The use of funds from the sale of the Ger­man port­fo­lio result­ed in a low loan-to-val­ue ratio of 32.8% (pre­vi­ous year 54.5%) and a read­i­ly avail­able cred­it line of CHF 52 million. 

Adjusted income statement

A net loss of CHF 29.3 mil­lion was report­ed in the income state­ment. CHF 35.9 mil­lion of this loss result­ed from reclas­si­fi­ca­tions from equi­ty to the income state­ment. How­ev­er, these one-off account­ing effects, known as “recy­cling”, had no impact on equi­ty and are elim­i­nat­ed in the fol­low­ing adjust­ed income statement.

Rental income increased by 0.7% fol­low­ing new rentals in the Swiss port­fo­lio. Net oper­at­ing income (NOI) decreased by 1.6% due to high­er repair and real estate expenses.

Based on the prof­itable oper­at­ing results and the suc­cess­ful sale of the Ger­man port­fo­lio the com­pa­ny made high­er bonus pro­vi­sions, which led to an increase in per­son­nel expens­es in the cur­rent finan­cial year.

The increase in admin­is­tra­tive expens­es was main­ly due to advi­so­ry expens­es in con­nec­tion with analy­ses of poten­tial prop­er­ty purchases.

Earn­ings before changes in mar­ket val­ue, finan­cial expens­es and income tax­es (EBITDA) decreased by 14.1% to CHF 2.9 million.

The Swiss port­fo­lio expe­ri­enced a pos­i­tive change in mar­ket val­ue of CHF 1.5 mil­lion. Of this amount, CHF 2.0 mil­lion was attrib­ut­able to three prop­er­ties with pos­i­tive changes; two prop­er­ties were writ­ten down by CHF 0.5 million.

In con­nec­tion with the refi­nanc­ing of the Swiss port­fo­lio, an inter­est rate hedg­ing instru­ment tak­en out in 2010 with an expiry date of 2026 was also set­tled. As a result the finan­cial expens­es report­ed in the income state­ment include a reclas­si­fi­ca­tion of loss­es con­tained in equi­ty in pre­vi­ous years. As this tech­ni­cal rebook­ing has no effect on equi­ty, it has been adjust­ed in the table above.

The adjust­ed finan­cial expense of CHF 1.6 mil­lion includes an expense of CHF 0.7 mil­lion incurred in con­nec­tion with changes in mar­ket val­ue up to the set­tle­ment of the finan­cial instru­ment in Sep­tem­ber 2017. Future peri­ods will no longer be affect­ed by the finan­cial instrument.

Adjust­ed earn­ings before tax­es (EBT) of CHF 3.2 mil­lion decreased by 15.5% com­pared to the pre­vi­ous yearʼs figure.

Income tax­es were reclas­si­fied from equi­ty in con­nec­tion with the set­tle­ment of the inter­est rate hedg­ing instru­ment. This reclas­si­fi­ca­tion, which does not affect share­hold­er­sʼ equi­ty, was elim­i­nat­ed in adjust­ed income tax­es. Com­pared to the pre­vi­ous year, adjust­ed income tax­es decreased by CHF 1.2 mil­lion, of which CHF 0.8 mil­lion was due to the release of a tax pro­vi­sion after a final tax assessment.

Adjust­ed earn­ings from con­tin­u­ing oper­a­tions rose from CHF 2.1 mil­lion to CHF 2.8 million.

Adjust­ed earn­ings from dis­con­tin­ued oper­a­tions relate exclu­sive­ly to the Ger­man real estate port­fo­lio sold in August 2017. This item has also been adjust­ed for loss­es from cur­ren­cy trans­la­tion and cash flow hedg­ing instru­ments rec­og­nized in equi­ty in pre­vi­ous years. These tech­ni­cal trans­fers from equi­ty (reserves for dis­con­tin­ued oper­a­tions) to the income state­ment have no impact on the lev­el of equi­ty. Adjust­ed earn­ings from dis­con­tin­ued oper­a­tions of CHF 3.8 mil­lion derived from CHF 3.2 mil­lion of real­ized cur­ren­cy gains in con­nec­tion with the repay­ment of share­hold­er loans as well as the oper­at­ing results of the Ger­man divi­sion for the peri­od April 2017 to August 21, 2017.

Adjust­ed earn­ings for the finan­cial year 2017/18 of CHF 6.6 mil­lion cor­re­spond to adjust­ed earn­ings per share of CHF 1.99 (pre­vi­ous year CHF 9.02). Adjust­ed earn­ings from con­tin­u­ing oper­a­tions amount­ed to CHF 0.83 com­pared to CHF 0.64 in the pre­vi­ous year.

While the effect of adjust­ed earn­ings is reflect­ed in equi­ty in full, the reclas­si­fi­ca­tions from equi­ty to the income state­ment have no impact. After the reclas­si­fi­ca­tions of CHF 35.9 mil­lion, the net loss report­ed in the income state­ment amounts to CHF 29.3 million.

Balance sheet ratios

The bal­ance sheet data and ratios as of 31 March 2018 are char­ac­ter­ized on one hand by the sta­ble Swiss real estate port­fo­lio and on the oth­er reflect the pos­i­tive impact of the sale of the Ger­man real estate port­fo­lio and the refi­nanc­ing of the Swiss portfolio.

The invest­ment prop­er­ties con­tin­ue to gen­er­ate a sta­ble net return of 3.7%. The vacan­cy rate of 10.1% fell from the pre­vi­ous year fol­low­ing new let­tings, but still offers poten­tial for increas­ing the net yield. The increase in mar­ket val­ue by 0.8% or CHF 1.6 mil­lion reflects both new rentals and the local trans­ac­tion market.

Mort­gages bor­row­ing fell by CHF 42.5 mil­lion com­pared to the pre­vi­ous year. In view of the ongo­ing neg­a­tive inter­est rate envi­ron­ment, funds from the sale of the Ger­man port­fo­lio were used to refi­nance the Swiss invest­ment prop­er­ties in Sep­tem­ber 2017. With the con­clu­sion of a CHF 118 mil­lion five-year revolv­ing frame­work loan agree­ment with a Swiss can­ton­al bank, Züblin is now once again financed on a long-term basis. Only CHF 66 mil­lion of the frame­work loan is cur­rent­ly drawn down, which means that an addtion­al CHF 52 mil­lion can be drawn at any time, for exam­ple for equi­ty invest­ments in future real estate acqui­si­tions as part of the imple­men­ta­tion of the growth strategy.

The finan­cial strength of Züblin is sol­id. Equi­ty increased by CHF 6.6 mil­lion. In addi­tion to the pos­i­tive adjust­ed earn­ings, the reduc­tion in debt financ­ing and the set­tle­ment of the inter­est rate hedg­ing instru­ment led to a strength­en­ing of equi­ty and the equi­ty ratio. As of 31 March 2018, the equi­ty ratio amount­ed to 61.6% com­pared with 31.8% a year ago.

Share price

Devel­op­ment of the ZUBN share price in the finan­cial year 2017/18

The share price per­for­mance in the finan­cial year 2017/18 was 22.6%

The share price rose by 22.6% from CHF 21.95 to CHF 26.90 in the report­ing year 2017/18. Net asset val­ue (NAV) per share on 31 March 2018 was CHF 38.85. The share was thus trad­ing at a dis­count of 31%.

Repay­ment of cap­i­tal reserves

The restruc­tur­ing of Züblin was suc­cess­ful­ly com­plet­ed with the sale of the Ger­man port­fo­lio and refi­nanc­ing of the Swiss port­fo­lio. The Board of Direc­tors pro­pos­es that the accu­mu­lat­ed loss of CHF 110.1 mil­lion for finan­cial year 2017/18 be ful­ly off­set against exist­ing statu­to­ry prof­it reserves and cap­i­tal reserves. In addi­tion, the Board of Direc­tors pro­pos­es a div­i­dend of CHF 1.00 nom­i­nal val­ue per reg­is­tered share (Name­nak­tie) of CHF 22.50 from the cap­i­tal reserves. This results in a pay­out yield of 3.27% based on the share price on 31 March 2018.