NOTES TO THE CONSOLIDATED SEMI-ANNUAL FINANCIAL STATEMENTS
1. General information on the company
Züblin Immobilien Holding AG and its subsidiaries (together the Züblin Group) are focused on the management of the Group’s real estate portfolio. As of 30 September 2017 Züblin Group operates in Switzerland and has employed 6 persons (31 March 2017:11 thereof in discontinued operations Germany five).
Züblin Immobilien Holding AG is a Swiss stock corporation domiciled at Klausstrasse 4, Zurich, Switzerland, and is the parent company of the Züblin Group. The Company’s shares are traded on the Main Segment of SIX Swiss Exchange.
2. Significant accounting policies
2.1 Basic principles
The consolidated semi-annual financial statements of the Züblin Group have been prepared in accordance with IAS 34 “Interim Financial Reporting” and with Art. 17 of the SIX Swiss Exchange Directive on Financial Reporting. The consolidated semi-annual financial statements do not contain all of the information and notes that are required at the financial year-end and should therefore be read along with the consolidated annual financial statements for the Züblin Group for the financial year ending 31 March 2017. Administration expenses were shown in the income statement in one line item and are now split up into personnel expenses and administration expenses to provide a more detailed view.
The consolidated semi-annual financial statements for the Züblin Group as of 30 September 2017 were approved by the Board of Directors on 8 November 2017.
2.2 Changes to accounting policies
The same accounting and valuation principles as for the consolidated annual financial statements as of 31 March 2017 apply to the presented consolidated semi-annual financial statements.
Since 1 April 2017 the following standards and interpretations have to be applied:
- IAS 7 (rev.): Disclosure Initiative
- IAS 12 (rev.): Recognition of Deferred Tax Assets for Unrealised Losses
The above amendements, interpretations and improvements had no material impact on the consolidated semi-annual financial statements.
Some new or amended IFRS standards and interpretations have been adopted by the IASB, but will only enter into force in a subsequent accounting period. With the exception of the standard described below, it is not anticipated that these new or amended standards and interpretations will have any material impact on the financial reporting of the Züblin Group. A systematic analysis will be performed later on.
The new accounting standard IFRS 16 Leases will not have a material accounting effect for the lessor, however, lessors are expected to be affected due to the changed needs and behaviours from customers which impacts their business model and lease products.
3. Critical accounting estimates and judgements
The preparation of the consolidated semi-annual financial statements requires the use of estimates and judgements by the Company’s management. These estimates and judgements affect the way in which assets, liabilities, income and expenses are reported and their valuation, as well as the disclosure of contingent liabilities and other disclosures in the semi-annual financial statements. The actual outturn may differ from assumptions and estimates that have been used. In the event that they subsequently differ from the actual outturn, the initial estimates and assumptions are revised to reflect the changed circumstances during the financial year in which these changes occur. In the Züblin Group the main accounting estimates and judgements relate to the valuation of investment property and income taxes. The disclosures of critical accounting estimates and judgements as presented in the annual consolidated financial statements are unchanged.
There were no changes in the valuation criteria in connection with IFRS 13 during the reporting period and there were no reclassifications within this category. The investment properties recognized at fair value as of 30 September 2017 qualify unchanged to 31 March 2017 as level 3 fair value inputs.
4. Discontinued operations
During the first six months of the financial year 2017/2018 the Group has sold its German portfolio consisting of twelve properties with an underlying gross asset value of EUR 152 million. The announced transaction between Züblin Immobilien Holding AG and the UK listed and domiciled property investment company CLS Holdings plc has been closed on 21. August 2017. Eleven properties were sold in a share deal and one property was sold via a direct purchase. With successful completion of the transaction the German business segment was deconsolidated. See also note 11 for further details.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as result from discontinued operations in the consolidated income statement. The prior-year figures of the income statement items are adjusted accordingly.
5. Exchange rates
6. Scope of consolidation
Due to the sale of the German portfolio "ZIAG Immobilien AG" and "Mittlerer Pfad 2–4 GmbH" were deconsolidated as of 21. August 2017.
7. Rental income
In the current period rental income increased by TCHF 53 (previous half year TCHF 36) as a result of vacancy reduction and indexation.
8. Personnel expenses
Other personnel expenses include effective and flat-rate expenses of employees and members of the Board of Directors, fees for organ liability insurance, costs for the recruitment of new employees and expenses for further training of existing employees.
9. Administrative expense
Administrative expenses could be significantly reduced by TCHF 301 compared to the pervious half year. Savings were mainly related to decreased expenses in the consulting area as well as lower audit and rent expenses.
10. Financial expense and income
As of 14 September 2017 the CHF 80 million interest rate swap was repaid at a market value of CHF 19.3 million, resulting in a valuation loss of CHF 0.7 million. The unrealized losses of CHF 2.6 million recorded in the equity cash flow hedge reserve were recycled through the income statement. Overall, the interest rate swap lead to financial expenses of CHF 3.3 million (previous half year CHF 0.1 million) in the current reporting period.
The shareholder loan granted to Lamesa Holding SA was fully repaid during the first quarter of financial year 2017/2018.
11. Discontinued operations
Income statement
The result from discontinued operations solely relates to Germany. Until the closing of the transaction as per 21 August 2017 there was a loss of CHF 29.6 million (prior half year: profit of CHF 5.7 million). As mentioned in the annual report as of 31 March 2017, the recycling of the unrealized losses on currency (CHF 29.3 million) and cash flow hedges (CHF 4.5 million) has a negative impact of CHF 33.8 million on the income statement of the current year. However it does not have any impact on the NAV ("Net asset value"). The remaining gain of CHF 4.2 million relates to the period 1 April to 21 August 2017. The income statement of discontinued operations presents as follows:
Balance sheet
As of 30 September 2017 there were no assets attributable to Germany since this division was sold. As of 31 March 2017 net assets of the German operations were as follows:
Net Cash Flows
Cash flow from discontinued operations presents as follows:
Züblin has received a net purchase price of CHF 59.5 million which represents the net assets value of the discontinued operations. The entire purchase price was paid in cash. Considering cash sold to the purchaser in the amount of CHF 0.6 million, net cash from discontinued operation amounts to CHF 58.9 million.
12. Investment properties
The change in value of the investment properties from CHF 198.5 million to CHF 199.7 million mainly reflects the positive letting development during the past six months. Weighted average lease term (WALT) increased from 5.2 years as of 31 March 2017 to now 5.5 years as of 30 September 2017.
13. Share capital
There were no changes in capital structure in the first half of the financial year 2017/2018. As of 31. March 2017 there were 3 318 027 shares with a nominal value of CHF 22.50 what leads to a share capital of TCHF 74 656.
14. Reserves
Reserves for Cash Flow Hedges
Züblin Group used derivative financial instruments, exclusively interest rate forward contracts and swaps, as part of its active management of the earnings spread between net rental income and refinancing costs. The swaps were treated as cash flow hedges and recorded at fair value. Hedge accounting in accordance with IAS 39 was applied.
For a financial instrument to be accounted for as a hedging transaction, the hedging instrument and the underlying transaction must satisfy particular requirements in terms of documentation, event probability, effectiveness, and reliability of measurement. As far as these requirements are met, the changes in fair value of underlying hedging instrument are recorded through consolidated statement of comprehensive income and accumulated in a special reserve within equity.
With the refinancing of the Swiss portfolio, the repayment of the interest rate swap and the sale of the German portfolio, the hedged future cash flows were no longer expected to occur and therefore the cash flow hedge accounting was discontinued. The amount accumulated in the respective reserves within equity had to be recycled through the income statement as a reclassification adjustment immediately.
Reserves from currency translation
The conversion of the financial statements of consolidated Züblin Group companies that are prepared in foreign currencies is performed on the basis of the functional currency concept using the Modified Closing Rate Method. As of the balance sheet date, the financial statements of the consolidated Züblin Group companies are translated from the functional currency into the reporting currency. The financial statements of foreign subsidiaries were converted as follows: the balance sheet, with the exception of equity, is converted at the year-end rates, while income and expenses are converted at the average exchange rates for the reporting year. The effects of this conversion were recorded directly in the consolidated statement of comprehensive income and accumulated within a separate reserve within equity.
As of 31 March 2017 all reserves from currency translation did relate to the discontinued operation in Germany. With the sale of all German investment properties on 21 August 2017, Züblin Group terminated the operating activities in Germany. As a result the amount accumulated in the reserves from currency translation had to be reclassified to the income statement as a reclassification adjustment immediately.
The following table summarize the development of the reserve for cash flow hedges and the reserves from currency translation. Such reserves which are relating to the discontinued operation in Germany are summarized within the reserves of discontinued operations.
As shown in the table before, all reserves have been recycled to income statement. The following demonstrates the allocation to the respective line items of the income statement.
The reported net loss of CHF 30.4 million for the first half year of the financial year 2017/18 includes negative effects of CHF 35.9 million from reclassifications of reserves on cash flow hedges and reserves of discontinued operations. These reserves were to be removed from equity and had to be recycled through the income statement.
Net comprehensive income or earnings without recycling effects from equity of CHF 5.5m provide for the period under review a more accurate picture of the performance of the Group, as the recycling did not affect NAV of the Group.
Earnings from continuing operations (loss of CHF 0.8m) were affected in the amount of CHF 2.1m. Without the effect from recycling, earnings from continuing operations stands at a profit of CHF 1.3m.
15. Future contractual maturities
Based on the financial liabilities as of 30 September 2017 the following future contractual payment obligations exist (undiscounted amounts):
Future contractual maturities changed significantly since 31 March 2017. This change mainly reflects the refinancing of the Swiss portfolio and the repayment of the swap. In the current reporting period the mortgage of CHF 108.2 million was repaid and a new credit agreement in the amount of CHF 118.0 million was signed, of which CHF 66.0 million was drawn as of reporting date.
Trade accounts payable and the other short-term liabilities are incurred in the course of the Group’s operating activities and are covered by the short-term assets.
16. Mortgages
As of 30 September 2017 Züblin Group’s real estate portfolio is financed entirely by one variable-rate loan. The amounts shown as mortgages in the balance sheet include closing fees of CHF 0.3 million (previous year CHF 0.0 million). These closing fees are also reflected in average effective interest rate.
The mortgage includes financial covenants which specify, among other things, adherence to certain financial indicators (loan-to-value ratio and equity ratio). The financial are summarized in the table below:
The Company monitors these covenants every quarter. The breach of a covenant may have a variety of consequences, but in the first instance typically leads to a higher interest rate and/or an accelerated repayment schedule. The Company then has a certain period in which to correct the breach. If the breach has not been corrected at the end of this period, the bank normally demands a faster repayment schedule or a (partial) repayment of the loan. The mortgage agreement also contains a “change of ownership” clause which stipulate certain consequences, such as the repayment of the entire loan if the ownership interest of Züblin Immobilien Holding AG on the borrowing subsidiary falls below 50%, or in the event that a single shareholder acquires more than 50% in Züblin Immobilien Holding AG.
During the first six months of the financial year 2017/18 and as of balance sheet date, the Company was in compliance with all of its covenants.
The table below summarizes the value of investment properties pledged as security for mortgages:
Future rental fee receivables for investment properties and insurance policies for investment properties have been pledged as security over and above the mortgage liens.
17. Loan to shareholder
As of 31 March 2017 the Group had granted a loan to Lamesa Holding SA, Panama in the amount of CHF 13 million. The loan bore an interest rate of 3% p.a. and was fully repaid in the first quarter of the financial year 2017/18.
18. Events after the balance sheet date
No significant events have occurred since the balance sheet date.