Half-year results of the Zug Estates Group impacted by the coronavirus
At Zug Estates, the first half of 2020 was also full of challenges related to the COVID-19 pandemic.
In our real estate unit, many of our tenants were forced to close their businesses during the government-mandated lockdown. This primarily affected our retail tenants and thus the Metalli shopping area. In the hotel & catering segment, international business travel ground to nearly a complete halt, which caused a substantial decline in sales.
Fortunately, we were able to hand over all 49 of the remaining condominium units in the Aglaya promotional project to their new owners on schedule, even despite the pandemic. What’s more, we have already been able to find fair, finalized solutions involving one-time rent reductions for more than 90% of the tenants directly impacted by the lockdown.
Net income of CHF 8.3 million was generated in the first half of 2020, down 68.3% from the prior-year period (CHF 26.1 million). After adjustments for revaluation and special effects, declining figures in the hotel & catering segment were largely responsible for a 22.7% reduction in net income, from CHF 15.4 million to CHF 11.9 million.
Increase in property income with a substantial decline in hotel and catering sales
The full-period effect of rental agreements, most of which were concluded in the previous year, increased rental income in the first half of 2020 by 5.4% to CHF 28.2 million compared to the same period of the previous year. Rent reductions of CHF 0.7 million were granted in response to the COVID-19 pandemic.
Income from the hotel & catering segment declined from CHF 8.2 million to CHF 3.6 million. At times during the lockdown, occupancy at our hotels fell to below 10%. While we have been able to report rising numbers since then, they are still significantly lower year on year. Gross operating profit (GOP) is at a mere 7.8% compared to 39.3% in the first half of 2019.
The sale of the last 49 condominium apartments in the Aglaya project generated CHF 72.5 million in income and promotional profit before tax of CHF 9.5 million. For the Aglaya promotional project as a whole, this translates into a return of 17.3% on our investment. Since no sales proceeds were booked in the prior-year period, this resulted in a substantial increase in operating revenue from CHF 36.7 million to CHF 105.4 million.
A revaluation of the real estate portfolio revealed an overall decline of CHF 13.6 million in the value of the portfolio, which corresponds to around 0.9% of all investment properties contained in the portfolio on June 30, 2020, and is attributable to a slightly more conservative appraisal of the market rents of retail spaces, both in general and with respect to a few specific office spaces. In the prior-year period there was a revaluation gain of CHF 11.5 million.
The average rate of interest of interest-bearing debt was reduced even further, from 1.4% to 1.3%. As expected, the significant decline in construction activity led to a reduction in capitalizable interest and a corresponding increase in financial expenses from CHF 2.5 million to CHF 3.5 million.
Stable portfolio with slightly higher vacancy rate
The portfolio’s market value of CHF 1.63 billion is the same as on December 31, 2019. The building on construction site 1 in Rotkreuz was commissioned in the first half of 2020. As expected, this caused the vacancy rate to rise accordingly from 3.3% on December 31, 2019, to 5.3% on June 30, 2020. Overall, we invested CHF 16.2 million in our portfolio during the reporting period. The weighted average unexpired lease term (WAULT) of 6.7 years (6.8 years on December 31, 2019) is very high for the industry.
While our residential products are in very high demand in the current market environment, we are currently seeing a certain amount of restraint due to the COVID-19 pandemic, particularly among large prospective tenants of office space. We are confident, however, that demand for the centrally located, high-quality and sustainably run office space offered by Zug Estates will remain brisk in the future, as well. Fortunately, the number of inquiries concerning retail space in the Metalli complex has remained stable and we do not currently see any indications that this might decline.
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 during the first half of 2020 from CHF 597.4 million to CHF 587.1 million, even despite payment of a special dividend. This debt has an average maturity of 4.8 years (previous year: 5.2 years). With an equity ratio of 55.7%, one percentage point higher than in the previous year, Zug Estates has a very solid equity base.
Project development with a focus on the Metalli Living Space
The city of Zug and Zug Estates presented the initial results of their joint “Metalli Living Space” planning process in March 2020, after which they collaborated with professional planners to perform a feasibility check. The reference project and a request for changes to the two development plans concerned are currently being prepared, along with all relevant documentation. The reference project is to be submitted to the city of Zug during the third quarter of 2020. The legally binding, modified development plans are expected to take effect in 2022/23.
As soon as it received the building permit, the board of directors greenlighted the planning phase for the final two buildings (S43/45) on the Suurstoffi site in Rotkreuz. Construction will begin as needed, taking COVID-19-related market recovery into account.
Gradual implementation of the sustainability strategy
The Metalli complex was connected to the Circulago lake water district according to plan in April 2020. Contracts to connect the remaining 16 properties were signed in December 2019. Commissioning is to take place in stages in 2021, 2023 and 2025. From that point onward, Zug Estates will be able to operate its entire portfolio nearly carbon free. Customers visiting the Metalli shopping area have been able to take advantage of public 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.
The installation of a carbon-neutral air conditioning system in the rooms of Parkhotel Zug was completed on schedule in April 2020, meaning that guests can now enjoy a considerably higher level of comfort.
Outlook for 2020
Due to the temporary impact of the rent relief measures enacted in response to the COVID-19 pandemic, we still expect rental revenue to increase for the year as a whole. Property expenses and financial expenses will be higher due to increased renovation and maintenance work as well as a decrease in capitalizable financing costs.
Although developments in the second half of the year are difficult to forecast, we expect sales and GOP in the hotel & catering segment to fall significantly short of the prior-year level due to the fact that our regular customers’ international business travel came to a halt, causing sales to plummet.
Both operating income before depreciation and revaluations and net income excluding revaluation and special effects are expected to be significantly lower year on year as a result.
Report dated August 28, 2020
Please refer to our website for the detailed half-year report: https://www.zugestates.ch/en/mn/downloads.html
We will be conducting an audio webcast in German today at 10:30 a.m. Patrik Stillhart (CEO) and Mirko Käppeli (CFO) will be available to answer questions following the presentation. No registration required.
CH +41 44 580 65 22
DE: +49 692 017 44 220
UK: +44 203 00 92 470
Live and replay link: https://webcasts.eqs.com/zugestates20200828
Link for participants of the audio conference (only slides, no audio): https://webcasts.eqs.com/zugestates20200828/no-audio
The corresponding presentation can be viewed on our website: https://www.zugestates.ch/en/mn/downloads.html
3 September 2020 | Publication of Sustainability Report
5 March 2021 | Publication of Annual Report 2020
13 April 2021 | General meeting of shareholders
For further information, please contact:
Patrik Stillhart, CEO
Mirko Käppeli, CFO
T +41 41 729 10 10, email@example.com
About Zug Estates
The Zug Estates Group conceives, develops, markets and manages properties in the Zug region. It focuses on central sites which are suitable for a wide range of uses and allow sustainable development. The real estate portfolio comprises the two sites in Zug and Risch Rotkreuz. The Group also runs a city resort in Zug incorporating the two leading business hotels Parkhotel Zug and City Garden, augmented by a range of restaurant outlets. As at June 30, 2020, the total portfolio value was CHF 1.63 bn.
Zug Estates Holding AG is listed on the SIX Swiss Exchange, Zurich, (ticker symbol: ZUGN; securities number: 14 805 212).
|Zug Estates Holding AG | Industriestrasse 12 | CH-6300 Zug | T +41 41 729 10 10 | www.zugestates.ch|